Tag: margin call risk

Is Crypto Margin Trading Good Or Bad?

Is Crypto Margin Trading Good Or Bad?

Trading on Margin, is it good or bad? Under what condition would it be considered as good? When market is at its peak or there is a dip? That’s the dilemma faced by many traders and investors who want to sail in the world of Margin, but is it good or bad? Let’s explore about the good and the bad of crypto margin trading in today’s post –

An individual borrows capital from the lender so as to invest and buy more assets/cryptos. The individual gets leverage, where he is [based on his analysis and intelligence] making a bet that his returns on the investments made on margin are going to be higher than the interest he needs to pay his lender, excluding fees for now. Point to note that the lender uses your cryptos in your crypto wallet as collateral so as to satisfy your margin. So margin could also be termed as debt.

The Good of Crypto Margin Trading

#1- Margin could help you in fulfilling “sudden capital requirement” or emergency

In need of some urgent capital? Then considering market sentiments, it could be a good idea to invest in Margin Trading. Borrowing capital at this stage based on your analysis may turn towards profit, start investing and in a few days once you make a profit you can cover your margin.

#2 – Margin could help in fuelling other investments of higher returns

There is this dream project you want to start off, or the market is just going as per your predictions and based on your analysis you feel investing more for higher returns, but not enough of it? Then Margin could help you in borrowing that money and reinvesting to get positive returns. Go ahead and use margin to start your position.

The Bad of Crypto Margin Trading

 

#1 – Margin is bad when you invest in cryptos that yield lower than your margin interest.

Although crypto margin trading is available for only selected cryptos, still it is wise to know which ones are the best to help you earn a positive ROI.

 

#2 – Margin is bad when you use it as a down payment for some other debt

 

Do not open Margin to use that capital in any other form of debt, that’s the riskiest venture. Take it this way you are already paying a margin interest on the borrowed amount, using it to get another debt is again starting a new cycle of interest payments and because you wouldn’t be earning any returns on your second investment in case your margin trade results in  a loss, it means no capital to pay interest of second debt as well.

What are your stories of Good and bad in crypto margin trading? Would love to know them. Please share your feedback with us @getnuo , our twitter handle.

 

References

goodfinancialcents, nerdwallet

Pros and Cons of Crypto Margin Trading

What are Crypto Wallets and How Crypto Wallets Work?

In our last post, we narrated about What is Crypto Margin Trading and Costing of Margin Trade with examples. If you missed our previous post, please check here. In today’s post, we would discuss about Pros and Cons of Crypto Margin Trading.

Cryptocurrency Margin Trading is like availing Home Loan. Just as you can buy a Home worth 50,00,00 with 20% down payment[i.e., 10,00,00] and rest 80% as a loan, similarly in margin trading of cryptos, you can own Bitcoin or Altcoin worth $5000 with just $1000 capital with 5x leverage. The mechanism of holding high worth seems lucrative but has associated risks with it. Let’s take a closer look at the advantages and disadvantages of Crypto Margin Trading.

Pros of Crypto Margin Trading

Margin Trading concept was born in the US and is now accepted widely across the globe. Let’s look at the advantages of cryptocurrency Margin Trading –

Access to High Worth at less Price

One of the most straightforward advantages of margin trade is owning a high worth asset at a lesser price. With Margin Trading a trader could own a digital asset worth of $10,000  by paying $2000 [excludes fees] with 5x leverage.

Larger Gains

If the trader has studied the market proactively and made the right decision to invest in Margin trade, with an upward market trend he can attain profit. Just for example if you have a margin call trade for a digital asset worth $10,000 by paying $5000, if using the leverage of 2:1, you can double your gains.

Cons of Crypto Margin Trading

Every coin has a flip side, so if you thought Cryptocurrency margin trading would only lead to profit and gains, hold on. Margin trading comes with its own set of risk, let’s evaluate –

Borrowing Money To Margin Trade Comes at a price

As a trader, there is no harm in dreaming of owning $1000, $10,000 or even $50,000 worth of bitcoins. With Margin trade it is possible as well, but the initial capital [assuming leverage of 2x] you need to borrow from lenders, you would need to pay interest on that amount. Now, this interest varies from exchange to exchange. Hence when you are calculating your gains, make sure to put in the interest amount you need to pay from your pocket.

Losses Could Be Amplified

Just as we saw gains are multiplied, and a trader could double his profit. Similarly, if the investor has not evaluated all the factors of market risks and cryptocurrency risks, the losses could be augmented.

Risk of Margin Call

Each exchange makes it a mandate for traders to maintain a minimum account balance say for example 25% of the open position. So in cases where the market is sailing in the opposite direction against your predictions, even your balance would fall below the set margin requirement, either you need to add more funds to your account balance to avoid a margin call or else the account would be closed automatically.

To excel in the art of Margin Trading all you need is an in-depth knowledge of cryptocurrency markets and risk management. Margin Trading is a useful investment strategy if applied intelligently could lead to a bigger account balance.

Our next post would talk about different exchanges that allow Crypto Margin Trading. Stay Tuned.

If you liked our post, please follow us on twitter [@getnuo] to get latest updates and insights.

Could Crypto Loans reduce credit risk and margin call risks?

Crypto Loans reduce credit risk and margin call risks

Crypto Loans or Blockchain-backed loans is the trending concept these days that assist crypto enthusiast in earning profits. While lenders enjoy the benefit of earning interest on their digital currency, borrowers use the funds to short sell or shorting. The interest rate earned by lenders vary from 5 – 50% each year.

As per a study by the Unchained Capital, the potential lending market for crypto assets is estimated at around $20-30 billion. Even though cryptocurrencies are highly volatile, they also offer high liquidity. Bearing in mind the possible risks of volatility, liquidity similar to fiat money makes cryptocurrency an ideal asset for loans in fiat.

But how could they be used to reduce credit risk? Let’s explore –

Crypto loans reducing Credit Risks?

Crypto-backed loans offer a unique opportunity to the borrowers to receive funds for any investment they want. Unlike traditional banking where interest rate varies with home loans, car loan or personal loan, crypto loans work with a simple equation of obtaining a loan in fiat of up to 50% of the market value of its crypto asset. Since the deposit is always more prominent than the loan amount, the creditor never can face the defaulter’s risk.

However, in cases when volatility has exceeded the threshold, the lender has the right to make a margin call, i.e., to sell off the crypto asset at market price to pay off the loan amount.

However, if the deposit amount has been affected due to a drop in cryptocurrency the borrower is sent a warning message narrating the deposit amount to be insufficient. In such cases, the crypto exchanges or crypto lending platform ask borrowers to deposit sufficient funds, pay off a part of debt [partially or fully] or sell part of the crypto asset to repay the remaining debt.

Crypto Loans reducing Margin Call Risks

The borrower can also reduce the risks of a margin call by smartly choosing the ratio of deposit and loan size. With a smaller loan amount value, less impact to the price fluctuations with lower interest rates and longer loan terms as it reduces loan risks to the lender, thereby saving borrower from the margin call risk.

While for banks defaulters risk is huge, in the crypto world it could be controlled and managed effectively. Crypto loans also offer the advantage of lower processing fees and fast processing. For more details on Advantages of crypto loans, check our post – Advantages of crypto-backed loans.

Crypto lending is one of the easier ways of earning a passive income if chosen wisely. It is also considered a common alternative to investors who are inclined towards crypto trading but could not find enough time to practice it daily.

Nuo is a decentralised and transparent crypto banking platform. It acts as a blockchain powered financial control centre to store, spend, borrow and grow your crypto-currencies. Install the android app or try out our crypto backed loans platform.

If you liked our post, please follow us on twitter [@getnuo] to get latest updates and insights.

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