Introduction to Margin Trading
Today, more and more exchanges provide crypto lovers with the opportunity to give margin trading a try (learn how to choose an exchange you can trust here). Since a margin loan has indisputable advantages (probably many of you have heard the expression ”invest other people’s money and earn"), we would like to acquaint our readers with the basic principles of this tool.
What is margin trading? In fact, this is a method of trading assets using funds borrowed from a certain exchange.Your own deposit acts as collateral. The platform that provides a loan also remembers about its own benefit — it charges fees for the service. For example, daily 0.1% of the amount. This is not so much, however, there are more serious “pitfalls” in margin lending. We will talk about them a bit later.
- you get a chance to earn money with a small deposit. Leverage temporarily increases your deposit several times;
- this method of trading equalizes the position between you and large traders. The average user receives a financial basis for trading. For example, it is possible to conduct transactions for $1000, having only $100;
- you maximize profit due to the number of transactions;
- this is a great way to get an adrenaline rush (if we consider this trading method exclusively from an entertainment point of view);
- if you have a verified account, you will obtain credit with minimal headaches. You do not need to conclude an agreement with the platform. The deposit in the exchange account that will serve as a margin is enough.
The Very "Pitfalls”
These are factors that cannot be discounted:
- in margin trading, your deposit acts as collateral. At the same time, the exchange is looking to see its own risk minimized. Of course, if the price starts to fall, the platform will not interfere in the process. Nevertheless, in case of strong price fluctuations (for example, cut in half with a 1:2 leverage), the exchange will forcibly close your position. This is particularly true when the trader risks not his own, but borrowed capital. Please note that the loss will be borne by you. This pretty horrible thing is called a "margin call”;
- from the above, it appears that you will not be able to withdraw virtual currency purchased with borrowed money as your own;
- this type of trading is unlikely to suit newbies. Margin lending requires experience, knowledge and the ability to analyze the market situation.
Now you know what margin trading is really all about, what are its advantages and risks. Once again such trading is not suitable for everyone (probably another strategy will suit you). But if you are mentally prepared for possible losses, feel the strength, and ready to take risks - good luck!