CryptoTech

What is Crypto Margin Trading & How Does it Work?

There are many different ways to trade cryptocurrency. You may have heard of “shorting” Bitcoin, margin trading, or trading with leverage.

All of these terms refer to the same practice — leverage trading — but the interchangeable way they are used can make understanding of how it works a little difficult.

Crypto margin trading doesn’t have to be complicated, however. In simple terms, The cryptocurrency market is volatile. The price fluctuations exhibited by crypto markets make it possible for crypto traders to turn a profit in both bear and bull markets through Bitcoin margin trading.

What is margin trading cryptocurrency, though, and how does crypto margin trading work?

What is Crypto Margin Trading?

Attempting to decipher the complicated world of crypto margin trading can quickly overwhelm a newer trader. If you’ve ever run a quick search on how Bitcoin margin trading works you’ve likely been presented with a massive glossary of terms such as leverage, liquidation price, margin calls, shorting, and more.

The basics of Bitcoin margin trading are relatively straightforward, though, so we’ll cut through the noise: Put simply, a cryptocurrency or Bitcoin margin trade allows traders to “borrow” capital in order to access increased buying power and open positions far larger than their “real” account balance.

Crypto margin trading is a trading practice that allows traders to gain greater exposure to a specific asset by borrowing capital from other traders on an exchange or the exchange itself. In contrast with regular trading in which traders use their own capital to fund trades, margin trading allows traders to multiply the amount of capital they are able to trade.

Margin trading is also often referred to as leverage trading — “leverage” is the amount by which a trader is able to multiply their position. A margin trader that opens a trade with 100X leverage, for example, will multiply their exposure and potential profit by 100 times.

Margin trading sounds great at first glance — the ability to multiply profits by 100X would capture the attention of any trader. There’s a downside to margin trading Bitcoin, however. Utilizing leverage in Bitcoin trading to amplify your position increases risk.

Can you lose it all when margin trading Bitcoin, though? If you’re able to multiply your profits by 100X, does that mean you could potentially end up owing an exchange 100X your losses?

Fortunately, The increase in risk when margin trading cryptocurrency is not proportionate to leverage. Trading with 100X leverage, for example, won’t multiply your losses by 100X — it’s not generally possible to lose more than you originally committed to trade, although losses can theoretically exceed committed assets in specific scenarios.

Margin trading is popular in markets in slower-moving, low-volatility markets such as the Forex market, but has become extremely popular in the fast-moving cryptocurrency market.

How Crypto Margin Trading Works

Leverage trading Bitcoin works relatively simply at a fundamental level. A trader gives the exchange a little bit of capital in return for a lot of capital to trade with and risks it all for the opportunity to make a significant profit.

In order to margin trade, a trader must provide an initial deposit to open a position, referred to as the “initial margin,” and must hold a specific amount of capital in their account to maintain the position, referred to as the “maintenance margin.”

Different cryptocurrency exchanges offer differing amounts of leverage. Some exchanges offer 200X leverage, which allows traders to open a position 200 times the value of their initial deposit, while others limit leverage to 20X, 50X or 100X.

The terminology used to define leverage can differ from platform to platform. Some exchanges in the Forex market, for example, will refer to 100X leverage as 10:1 leverage. Leverage is typically referred to via the former “X” terminology in the cryptocurrency trading ecosystem. 100X leverage is the same as 100:1 leverage.

If you open a margin trade with a cryptocurrency exchange the amount of capital you deposit to open the trade is held as collateral by the exchange. The amount you are able to leverage when margin trading depends on the rules imposed by the exchange that you trade on and your initial margin.

Going Short Versus Going Long

When you open a crypto margin trading position, you’ll be presented with the choice between “going short” and “going long.”

A long position is taken by a trader that anticipates the price of a digital asset will increase. Going short, or “shorting,” is the opposite. A trader will open a short position if they believe a digital asset will decrease in value. Shorting is often used by traders that seek to profit from falling cryptocurrency prices.

It’s important to note that the exchange you trade on will hold collateral for the capital you borrow when margin trading. Should you successfully close a position at a profit the exchange will release the cryptocurrency you deposited to open the position, along with any profits.

If you realize a loss when margin trading, however, the exchange will automatically close your trade and “liquidate” your position. This occurs when the price of the asset that you are speculating on reaches a specific threshold, referred to as the “liquidation price.”

Understanding Margin Calls & Liquidation

When you borrow money from an exchange in order to margin trade Bitcoin, the exchange that provides the capital keeps a number of controls in place in order to minimize risk. If you open a trade and the market moves against you, it’s possible that the exchange will request additional collateral in order to secure your position or forcibly close the position.

When this occurs, your exchange is likely to hit you with a margin call. A margin call occurs when the value of the asset in a margin trade falls below a specific point. The exchange funding the margin trade will request additional funds from the trader in order to minimize risk. Most exchanges will notify traders via email, but it’s important to actively monitor your margin levels.

If the margin level of a position becomes too insecure an exchange is likely to liquidate the position — this is referred to as the margin liquidation level or liquidation price. Liquidation occurs when an exchange automatically closes a position in order to ensure the only capital lost is the capital deposited by the trader that opened the position.

Let’s suppose a trader opens a 2:1 long position when the price of Bitcoin is $10,000. The cost of the position is $10,000, but the trader has borrowed an additional $10,000 from the exchange. The liquidation price of the position is, therefore, $5,000 — at this price level, the trader has lost their initial $10,000 collateral and is thus liquidated by the exchange.

Why Margin Trade?

Margin trading allows confident traders to open positions that are potentially far more profitable than they would otherwise be able to access. A successfully closed position at 100X leverage, for example, will yield 100 times more profit than a position opened via a “normal” trade.

Margin trading Bitcoin and other cryptocurrencies also allow strategic traders to generate profit in a bear market by opening short positions. A trader that anticipates a significant price dip, for example, could potentially commit a portion of their portfolio to a short position in order to generate a profit that offsets the potential loss incurred by a major price dip — if closed successfully.

Crypto Margin Trading Exchanges

Choosing the best bitcoin leverage trading platform can be a difficult process — there are many cryptocurrency exchanges online today that offer leveraged trading. Trading on the highest leverage crypto trading platform is not always the best option. There are a number of important factors that should be considered when selecting margin trading crypto exchanges.

Different exchanges offer different levels of leverage availability. Some margin Bitcoin exchanges, such as PrimeXBT, offer up to 100X leverage. The interest rates offered by on leveraged trading are another essential factor — depending on the length and leverage of your position, you may end up paying extremely high-interest rates.

BitMax, for example, is a highly popular cryptocurrency exchange that offers leveraged trading of up to 100X with variable interest rates — one of the highest leverage Bitcoin trading platforms online. The interest rates offered by BitMax can be as low as 3.65% per year, or 0.01% per day, which is a highly favourable rate for short-term positions.

Some margin traders use complex order types in order to take profit incrementally or set up stop losses, which minimize the risk of liquidation. Some margin crypto exchanges may offer fewer order type options than others. ByBit, another margin trading crypto exchange that offers up to 100X leverage, makes a wide range of complex order types available to traders seeking to create effective risk management strategies when margin trading cryptocurrency.

It’s also important to consider the funding and fiat support options available when margin trading. CEX.io is one of the few reputable cryptocurrency exchanges that offer both crypto margin trading and fiat deposits, which makes it possible to fund or withdraw from an account via wire transfer or credit card payments

The KYC and AML requirements may affect the availability of leverage crypto exchange options in your specific location. US Securities law may prevent US-based traders from leverage trading crypto on some platforms, so it’s important to check which platforms are available in your locality. Simex is an example of a popular crypto margin trading exchange for US traders.

How to Margin Trade Crypto

Understanding how to leverage trade crypto can be somewhat complicated to newer traders. We’ll proceed to break down the process of creating a leveraged Bitcoin position. In this example, we’ll demonstrate the steps involved in opening a leveraged Bitcoin position on PrimeXBT.

The steps involved in this process are:

  1. Registration
  2. Funding
  3. Trade screen navigation & outline
  4. Opening a position

3. Registration

The first step in learning how to how to leverage trade bitcoin is to create an account with PrimeXBT. You’ll need to navigate to the PrimeXBT exchange website and complete the signup process to create an account.

PrimeXBT

After confirming your email address and country of residence, you’re ready to fund your account.

2. Funding

Before you can start trading on PrimeXBT, you’ll need to fund your account so you have the capital to open a position. PrimeXBT’s onboarding process you will prompt you to make a deposit via Bitcoin:

PrimeXBT

PrimeXBT provides traders with the option to fund their account via Bitcoin deposit or via credit card purchase. Funding your account via credit card is nearly instantaneous, but does incur a higher fee than funding your account via Bitcoin.

Once you’ve funded your account you’ll need to navigate to the “account summary” tab on the sidebar of your PrimeXBT account and fund your trading account — this is an instant internal transfer that moves Bitcoin from your wallet to your active trading account.

3. Trading Screen Navigation & Outline

After funding your trading account, it’s time to navigate to the trade window by clicking “Trade” on the top navigation bar. You’ll be presented with the trade window. Select the BTC/USD pair at the top of the currency pair list and click “Trade”.

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