The traditional method of trading cryptos i.e. buy and sell digital currencies in an exchange using your own fund has been in place for some time. But Crypto Margin Trading has been a new concept that is picking its pace with more platforms/exchanges offering the trade and traders keen to explore it.
The major difference between a margin trade and regular trade is that in former the individual could borrow money from an exchange to boost his buying power and opening gates to higher gains/losses. On the other hand the regular trade an investor buys coins/tokens at the market price and holds it until the price shoots up, either over the long or short term to sell them for a profit.
While regular trade sounds like a simple concept with sure shot profit, margin trading is riskier and need lots of research and intelligence to gain profits. Are Crypto Margin Trades anytime profitable? Lets have a closer look –
Crypto Margin Trading – Is it Profitable?
Margin Trading is based on the power to leverage. While lenders play safe and lend you the money to trade, the traders/investors use that money to open positions in the market. Many investors consider it a double sword game as a trader need to pay the interest on the amount borrowed and also in case drop in the market, there is a risk of margin call.
However, with all this some experts love Margin Trading and earn profit as well. Here are few considerations an investor should bear in mind before approaching for a margin trade.
Availability of Margin for Trading
The whole game is based on margin, and is directly proportional to your gains or losses. While the average leverage is about 3:1, other platforms and exchanges offer 2:1, 4:1, 5:1, 3:33:1 or even 1000:1. Lets pick an example –
So you are planning to buy $10,000 worth of Bitcoin
With borrowing 50% Or leveraging 2:1 or 2x
Then you would only need $5000 to purchase a bitcoin worth $10,000.
So while the purchasing power is 1/2 and deal seems profitable, consider when the prices fall and there is a risk of margin call.
Interest Rates Applied on the borrowed amount
Continuing with the same example above, if the amount $5000 that you borrowed has a very high interest rate then it wouldn’t sum up to be a profitable trade, so choose a lender/exchange with nominal interest rates. In crypto margin trading the interest rates are calculated on daily basis, and with price fluctuating you need to top up your account to avoid lender from credit risk, in case market is going steep down. So make sure to account for the interest rates so as to know the amount exactly you need to pay back to the exchange.
Value of Crypto
The value of cryptos is different in each country and is never pegged to USD or any other fiat currency. However the price is still determined in a fiat used by a specific country. Just for example if you search Bitcoin price on Google, it might return in USD as it takes the price from Coinbase API that provides results in USD.
So in Crypto margin trading an investors profit/loss is calculated with respect to the underlying coin i.e usually Bitcoin. So if you are trading a pair of ETC/BTC, so the price movement is not only based on the coin you have invested in but also the price fluctuations of the crypto that it is based on.
References – Ambcrypto, Investopedia