How can margin trading help harness the power of cryptocurrencies?

The popularity of cryptocurrencies has grown significantly over the past two years. More and more investors are pouring their money into cryptocurrency, as a result of which the volume of transactions in this market exceeds already $ 45 billion a day.

Liquid cryptocurrency exchange, one of the pioneers in the field of cryptocurrency margin trading, provides its users with the opportunity to maximize profits from trading bitcoins by trading with a leverage of up to 25x. Spot trading remains the main option where purchases and sales of a certain currency are made. Nevertheless, margin trading allows you to achieve greater profitability with the same amount of investment.

But with the development of the cryptocurrency sector, security issues arise. Liquid is listed on the Japan Financial Services Authority, which is known for its rigorous regulations. Liquid uses two-factor authentication, a cooling period for password reset and a whitelist of IP addresses, so only the user can access the trading platform. Funds are stored offline in a cold wallet, and there are practically no potential risks, except for losses from trading.

Margin trading allows you to borrow funds for trading directly from the exchange, based on the selected leverage multiplier. For example, if a user wants to invest $ 25,000, and the balance on his account is only $ 1,000, he can use a 25-fold leverage on the Liquid platform to open both long and short positions for $ 25,000.

Long positions are bets on increasing the value of an asset. For example, if $ 10,000 is placed on Bitcoin with a 2-fold leverage per long position, and the price of Bitcoin rises, the profit will be twice as much. This is because of the shoulder multiplier. If, say, we borrow another $ 10,000 from an exchange lending pool and believe that the BTC price will increase from $ 10,000 to $ 15,000, the following will happen: with a leverage of 1: 1, the profit will be $ 5,000. Refusal of double leverage will allow you to get higher profits, as a result of which you will receive $ 10,000.

Short positions work the same way, but you bet that the value of this asset will decrease. For example, if you open a short position on Bitcoin from $ 10,000 with a 2-fold leverage, and the price of Bitcoin drops from $ 10,000 to $ 3,000, you will get $ 14,000, as opposed to $ 7,000, which you would receive without leverage.

Liquid credits the margin trading of the user from the so-called "lending pool". This is a liquidity pool in which users can borrow funds or provide them for a certain percentage fee.

Leverage, however, also increases risks, since you are not only working with your funds. A fall in price of 5% for a long position can lead to a loss of 10% if your leverage is 2x. If the price of the asset at which you opened a long position continues to fall, this will lead to liquidation of the position in order to prevent further losses.

Margin trading is a trader’s best friend when it comes to harnessing the potential that this tool has. As cryptocurrencies continue to evolve and be recognized as significant assets such as Bitcoins, Ethereum and other cryptocurrencies, they can be the best driver for entry-level traders and large retail players around the world. The market is open 24/7, while transactions do not go through intermediaries on most exchanges.

For more information, you can visit the Liquid video section of the exchange and read their blog posts, as they can provide insights into the most diverse aspects of crypto trading.

Publication date 08/27/2019
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