What if you could trade cryptocurrency with more money than you have? Margin trading in cryptocurrency is precisely that. Traders can try to increase their gains (or losses) by borrowing money in exchange for additional fees and interest. Professional traders frequently use this high-risk strategy.
Margin trading in cryptocurrency markets can result in incredible gains or devastating losses. When trading on margin, inexperienced traders should proceed with extreme caution.
What is Cryptocurrency Margin Trading?
Margin trading in cryptocurrency entails borrowing funds from an exchange and using them to execute a trade. Margin trading is also known as trading with leverage because it involves traders “leveraging up” their transactions beyond the available capital.
Consider this scenario: suppose a trader opens a long position on Bitcoin for $100 and the price rises by 10%. The trader would profit by $10 (excluding any fees). If that same trader used 5x times leverage on the same trade, their profit would be $50 (10 x 5 = 50).
Some cryptocurrency margin traders use 10x, 50x, or even 100x leverage. And this can increase potential gains but also significantly increase the risk.
How Does Crypto Margin Trading Work?
Margin trading cryptocurrency entails borrowing money to make larger or more trades. The liquidation price, on the other hand, is an important consideration. When the market gets to the liquidation price, the exchange will close a position automatically. And traders do this to ensure they only lose their own money and not the funds lent to them.
The liquidation price for a position on an asset is zero when trading with one’s funds. However, as leverage increases, the liquidation price approaches the price a trader purchases.
Margin lending allows investors to establish either long or short positions (yes, it is possible to short Bitcoin), allowing them to profit regardless of how the market moves.
Assume the price of one Bitcoin (BTC) is $10,000. A trader who wishes to engage in Bitcoin margin trading opens a long position by purchasing one Bitcoin with 2x leverage. That means they would have spent $10,000 and borrowed another $10,000 for a $20,000 trade position before fees and interest. The liquidation price, in this case, would be slightly more than $5,000. When traders reach this level, they lose their entire investment, plus interest and fees.
And this is why: Normally, buying $10,000 worth of BTC would require the price to fall to zero before a trader would lose their entire position. However, with 2x leverage, the bet is now doubled. A trader’s potential gains or losses have been multiplied by two times their initial investment. As a result, if the price falls by 50%, they will lose 100% of their investment (50 x 2 = 100).
Because fees and interest are part of the cost of opening the position, the exact liquidation price in this example would be slightly more than 50% less than the buy price.
Cryptocurrency and Risk Management Trading on Margin
Margin trading is hazardous. The greater the volatility and the greater the leverage used, the greater the risk, as the likelihood of a trader being “blown out” of their position (when the liquidation price hits) increases.
Margin trading in cryptocurrency is thus one of the riskiest ventures an investor could undertake. Many traders hedge their bets by opening opposing positions to manage this risk. And this is a common approach to investment risk management. To avoid extreme financial trouble, you can conduct other investments through Bitcoin 360 AI.
The Bottom Line
Professional traders frequently use margin trading in cryptocurrency. Because of the leverage involved, market moves can become exaggerated, resulting in “long squeezes” or “short squeezes,” in which a sudden price movement can trigger liquidations and increase volatility. And this frequently occurs in the cryptocurrency markets, which trade very thinly compared to most traditional markets.