Professional trader, Josh Rager, recently published a Medium post, in which he outlines the do’s and don’ts of margin trading a digital assets derivatives market. In addition to highlighting the risks and opportunities inherent with this form of trading, Rager and associates also identify crypto derivatives exchange, Bybit, as the best platform to conduct this advanced form of trading.
The digital currencies asset class has come a long way in the 10 years since Bitcoin first went live. So much so that, most cryptocurrency exchanges have increasingly introduced many trading formats that are geared towards minimizing investor risk and exposure. Incumbent financial powerhouses (who originally shunned the asset class) have begun to offer platforms like Bakkt and ErisX, enabling traditional investors to profit from crypto market fluctuations without the exposure of actual spot trading.
Margin Trading offers digital asset traders the opportunity to increase purchasing power through a mechanism known as leverage. Leverage represents a ratio between personal capital exposure and how much one can purchase (leverage basically enables one to execute a trade of a higher value than the capital they contribute). Other benefits to leveraged trading include:
• Counter Party Risk Mitigation – This entails the risk involved with one of the parties taking part in a financial transaction. In the case of digital assets, this risk was represented by the high rate of exchange hacks. Leverage trading reduces counter party risk by enabling one to trade a higher amount of crypto than contributed
“You can deposit 1/10 of that onto a leveraged futures exchange, turn up the leverage to 10x and trade as if you were using 1 whole Bitcoin.”
• Increased Capital Efficiency & Exposure – By using leverage, one effectively controls a higher position with a smaller amount of capital, thus enabling one to enter more positions and increase market exposure.
• Higher Leverage On Individual Trades = Higher Potential Returns – by applying even a small amount of leverage to a trade, one can potentially increase their gains exponentially, compared to spot trading a coin
Manage Risk – Just as leverage serves a trader during a bull market, the mechanism works in the opposite direction as well. Proper risk management is necessary to avoid getting wiped out when markets go awry and start flashing red. Greed can get one rich, but being a hog is a surefire way to get slaughtered. Over leveraging a trade can lead to a trader’s position being liquidated should the market suddenly experience a downturn.
Rager recommends Bybit because the platform allows traders to set stops and limits to their position before confirming a trade.
‘’Luckily on Bybit, you don’t have to expose your whole account as margin and risk liquidating your entire account. Instead you can use the isolated margin feature to limit specific margin to specific trades”
Keep An Eye On Market Conditions – While taking a 100× leveraged position may sound attractive, such a move can quickly turn against a trader in the event of the market suddenly going in the opposite direction. Rager warns traders to keep abreast of market activity before applying leverage to their position. Digital assets remain volatile.
Apply Stops – In the event that markets turn on you, “slippage with a sure exit is better than being liquidated” cautions Rager. When taking higher leverage positions, it behooves one to apply tighter stops. He goes on to advise traders to set stops well ahead of the liquidation point.
Though Josh Rager’s tips are specifically for the Bybit platform, which is optimised for margin trading crypto derivatives, his playbook can be applied to, just about, any platform that allows for margin trading. Digital Asset trading remains a risky activity, though introduction of margin trading and derivatives points to a maturation of the asset class, it is wise to enter trades with a game plan that goes beyond the Moon & Lambo rhetoric that is endemic to the crypto trading arena.