There are multiple strategies to earn profit in the crypto market, and margin trading is one of them. Margin trading is not only an efficient way to invest but also one of the most used ones.
In this article, I will introduce you to margin trading, including its definition, how it works and how you can use it in your own trading.
What is Margin Trading?
Margin Trading is the type of investment that uses leverage, meaning that you invest with more capital than you originally have. There are various ways to leverage your capital. For margin trading specifically, leveraging is done by borrowing money from others.
How does Crypto Margin Trading work?
Margin trading works by borrowing capital to leverage your order value, meaning creating a loan. In crypto, there are numerous leverage levels, ranging from 2x to 100x. When you open a margin trading order, your original fund will be considered the collateral, while your total order value will be that multiplied by the number of leverage.
Let’s put this into an example.
Consider you want to open a $10,000 position. Originally for spot trading, you need $10,000 in full to achieve such a goal.
Nevertheless, margin trading offers a lot more approaches. To fill a $10,000 order, you can use $5,000 with a 2x leverage, $1,000 with a 10x leverage, or even only $100 with a 100x leverage. This is extremely useful if you want to increase your order size while maintaining your initial investment value.
The difference between the three options above lies in the collateral amount (initial invested capital) and the leverage level. As you can see, filing a $10,000 can be done with both $5,000 or $100 using margin trading. However, the first option uses only a 2x leverage while the latter uses a 100x.
There is no doubt that the higher the leverage, the more exposure you get from the loan. At the same time, the chance of liquidation - an event that happens when your collateral becomes inadequate in value to maintain the loan (as it goes down in price), so it has to be entirely sold - will also increase.
For a detailed explanation of the above example, a 2x leverage order will be liquidated when the collateral asset goes down 50% in price, whereas a 50x leverage one will be liquidated with just a 2% loss of the collateral value. It can be clearly seen that higher leverage leads to higher risks, even though the two options result in similar order sizes.
Margin trading is also more versatile compared to original spot trading. In spot trading, you can only gain profits if the asset goes up in price. Nevertheless, in margin trading, you can long to speculate the price going up or short to assume that the price will go down.
Types of Margin Trading
In crypto, there are two main types of margin trading: Isolated and cross. In this part, I will introduce you to both of them and how they are different.
Isolated Margin Trading
In Isolated Margin Trading, each order you open is related to a specific trading pair (for example, BTC/USDT). One order position is linked to only one trading pair. Hence it is independent of other positions as well as other trading pairs.
Cross Margin Trading
In Cross Margin Trading, all of your margin orders will be connected together. This means that your position, liquidate risk, collateral assets,... will be considered across all of the existing orders.
For example, you have 3 orders across 3 trading pairs: BTC/USDT, ETH/USDT, BNB/USDT, each with different order sizes and leverage.
In the case of isolated margin trading, each order will be handled separately. Your order on BTC/USDT may be liquidated, but that is not related to the other two.
However, in the case of cross margin trading, all of the three positions will be taken into consideration. As a result, if you were to be liquidated, all of them will be liquidated at the same time.
What is Margin Trading used for?
Margin Trading is extremely useful for leveraging your capital. If you can manage your portfolio well, leverage will be a strong tool to gain profits.
Some cases that Margin Trading can be used for are:
- Implementing leverage for more profits.
- Diversifying investment strategies to earn in both bull and bear markets.
- Hedging against other positions.
- Speculating on small price movement using technical analysis.
How to calculate Margin when trading?
Your liquidation level will be calculated based on your leverage. Spot trading means trading assets at 1x leverage, so there is no probability of liquidation. For a 2x leverage, meaning you are doubling the order size, your order will be liquidated if the collateral value reduces by half (50%).
Similarly, for a 10x leverage order, for instance, you will be liquidated if the initial fund reduces by 10%. As for a 100x leverage, only a 1% loss is enough to liquidate your position.
Advantages & Disadvantages of Margin Trading
- Increase position size by leverage.
- Minimize required capital, allowing users to save up money for other investments.
- Can be used to gain profits in both ups and downs of the market.
- Extremely solid tool for advanced investors.
- Risky, can bring as much loss as profit.
- Need experience in order to fully utilize it.
How to Margin Trading
The process of implementing margin trading differs across various platforms. Overall, the process often looks like this:
Step 1: Choose to use isolated or cross margin trading.
Step 2: Get access to that feature on the platform you are using.
Step 3: Select the trading pair.
Step 4: Choose the leverage after considering your risk/reward and open your position.
Top crypto exchanges for Margin Trading
Most crypto exchanges have supported margin trading up to this time. Here are some of the most used and popular ones.
FTX is one of the best crypto exchanges, especially in derivatives. You can use FTX to use all types of leverage trading, from margin trading to futures contracts and leveraged tokens. The fees for using FTX features are also incredibly cheap.
Learn More: How to trade margin on FTX Exchange
Binance is currently the number one crypto exchange. It supports a massive number of trading pairs with high leverage availability as well as liquidity.
Learn More: How to trade margin on Binance Exchange
Gate is also an awesome platform for leverage trading. Being different from the other two mentioned above, Gate gives more attention to low and mid-cap altcoins. Do pay attention to the liquidity on those kinds of tokens before using leverage on them, though.
Margin Trading in Crypto FAQ
Is Margin Trading safe?
Margin trading is safe as long as you understand its risk and how to manage your position in order to avoid liquidation events.
Is Margin Trading good for beginners?
Beginners often struggle with margin trading as they focus too much on the possible gain margin trading can bring them but forget that it can also bring as much loss. As mentioned above, every crypto investor should understand margin trading clearly before actually using it.
This is everything you need to know about margin trading. If you have any questions about margin trading, don't hesitate to leave a comment below. The Coin98 team will answer your questions as soon as possible.