What is margin trading cryptocurrency with leverage – principles and exchanges

The whole history of the existence of cryptocurrency is inextricably linked with various types of speculation. Previously, their main part was to participate in direct deals on the purchase / sale of coins actually available to users through exchange services and cryptocurrency exchange exchanges .

However, in recent times especially popular offshoot kriptotreydinga became cryptocurrency margin trading, which is increasingly attracting newcomers to acquire quick profit. Moreover, not all of them are aware of the associated financial risks. And they, of course, are.

Therefore, before taking the first steps in the marginal cryptocurrency trading, it is recommended to pay attention to studying the basics and features of this type of trading.

What is marginal crypto trading?

The definition of "margin trading" is a kind of speculation in the stock or cryptocurrency market, which is the use of borrowed funds in the business of a trader or its users (in rare cases).

As in any other situation with obtaining credit loans, the user must provide a pledge – in this case, deposit the amount that guarantees the payment of debt obligations according to the rules established by the site. Own funds allocated for the opening of such a transaction – this is the margin (hence the name of this type of speculation).

You can also come across the term “trading with leverage”, which is an alternative designation for this type of trading due to the presence of leverage – a multiplier (1–100x) in it, which increases the user's deposit available for a transaction using borrowed funds. Thanks to this opportunity, the user can make a profit that is many times greater than the one that would have been present during speculation only by his own means.

The principle of operation of margin transactions

Positions that can be opened by a user in a crypto-exchange that offers this service are conditionally divided into two types:

• Long (long, long) – when the user expects the asset to grow;
• Short (short, short) – when the bet is placed on lower prices.

If the value of the cryptocurrency moves in the direction predicted by the trader, the income that he can fix on the transaction increases in proportion to the selected leverage. At the moment of closing such a position, the body of the pledge is returned to the creditor (exchange) together with the commission fees, and the remainder of the profit is credited to the user's account.

For example, if a stock exchange offering this service makes $ 1000 and opens a bitcoin position in a long with 10x leverage (1:10), the amount of the open position will be $ 10,000 (the amount of the trader’s amount increased tenfold). If the price increases by 1%, the user's profit will be calculated from the total amount of the transaction, i.e. make $ 100. Total, when closing a position at this point, the trader’s balance sheet will be $ 1,100 (minus site fees and other payments determined by its rules). If there was no shoulder, the profit would be only $ 10.

In addition to fees for opening / closing transactions, on some sites there may be so-called financing rates, which pay each other holders of long and short transactions, depending on the number of open positions of each type.

Reverse side of the coin in trade with leverage

An important point in margin trading is that a liquidation price is set for any transaction — the price mark calculated by the exchange, upon reaching which the position will be automatically closed with a full withdrawal from the user's balance of the margin that ensures it.

That is, if in the example described above, a deal in Long opened at a bitcoin price of $ 10,000 and the price of liquidation would have been designated at $ 9,500, a fall in the rate to that mark would have led to a loss of $ 1,000 contributed by the trader.

Of course, it is not necessary to use all the assets on the balance sheet for opening deals with leverage. It would be more correct to allocate only part of the deposit for opening a position, reserving the possibility of averaging a position when the course is moving in the opposite direction from the expected one. In this way, the price of liquidation is achieved, which very often helps to wait out the drawdown and wait for the asset price to return to the calculated range for profit.

In classical trading with a leverage on the stock market, the described situation with the liquidation of a position would be preceded by a margin call (from the English. Margin call, margin call) – the requirement of additional security, which is the broker’s notification of the client’s insufficient margin and risk of forcibly closing the position if additional funds are not added.

However, due to the rapid movement of quotations in cryptocurrency pairs, the concept has shifted – the margin call now is called directly the moment of liquidation. In crypto trader slang, loss of position sounds like “catch margin call”.

You should also pay attention to the fact that in the cryptocurrency margin trading there are two main types of orders:

• Perpetual contracts, when the position is open, until the user closes it or the liquidation happens;
• Futures contracts that close automatically when they expire.

The first option is the easiest and safest, especially for newcomers to the cryptocurrency margin trading. The second implies an additional risk in the form of closing the transaction at the time when the price of the asset will be in the wrong range, implying a loss.

What should always be remembered in margin trading?

To become a professional in trading with leverage and minimize the risk of losing a deposit, you should always remember that:

• The margin trading of cryptocurrency is a type of taking a loan, which must be returned, at least with the payment of established commissions, as much as possible with loss of the deposit body. Thus, you can keep yourself from taking rash actions in the form of taking too much leverage or using the entire deposit for trading;
• Reckless opening of deals with leverage by the user without a serious level of trading skills will most likely lead to a loss of the deposit;
• The choice of a cryptocurrency asset for margin trading needs to be made based on an analysis of its volatility. To open a transaction, it is recommended to choose periods when the likelihood of so called “helicopters” is minimal – sharp price spikes in different directions, with which the market maker tries to dislodge as many traders as possible. The ideal options are trading with a shoulder of altcoin pairs to Bitcoin, on the charts of which predictable repeating fractals can be traced;

• A failed transaction can be completed independently, without waiting for the moment of liquidation. At the same time, instead of the entire position, only part of the margin is lost from the user's balance (professionals try to prevent more than 20% loss). This can be done not only manually, but also by setting a “stop-loss” (stop loss), which is a type of order to limit trading risks, which implies automatic closing of the transaction when a certain price is reached. The same tool saves from losing a position at the moments of the “helicopters” described above;
• On some sites offering cryptocurrency margin trading tools, there is a possibility of changing leverage “on the fly”, which allows you to change the risk / reward ratio for an open position at a convenient time. For example, if your transaction went out to a good plus and the course movement in the opposite direction is not foreseen, you can increase the leverage (if there is enough free margin for the margin on the balance sheet), thereby changing the profit margin. But it is worth remembering that when changing shoulders "on the fly" the price of liquidation also shifts – with an increase it approaches, with a decrease it moves away. In the first case, the risk of “catching margin calls” increases. In the second, it is possible to delay the automatic closing of a position for which the trader’s forecast did not come true;
• Some exchanges practice charging fees for transactions not only at the time of their opening / closing, but also in the process, at regular intervals. You should not forget about this, as well as about the possible presence of the aforementioned mutual funding system, by holding positions with a small leverage for a long time. Otherwise, the costs of the transaction may be disproportionate to the risk and the resulting profit;
• An open position that will soon be eliminated can always be averaged by purchasing additional contracts and thus saving it from closing. However, many professionals believe that this is the way to drain the deposit, since the trend can drag on and as a result you simply do not have enough of your own funds to constantly push back the liquidation.

How to start trading with leverage?

A beginner who wishes to try himself in this kind of cryptocurrency speculation is advised to proceed as follows:

1. To study the theory of margin trading cryptocurrency. At a minimum, available in this article. Ideally, study other sources, including sections on the FAQ (questions and answers) on exchanges that offer trading tools with leverage.
2. Choose a trading platform based on its reputation, reviews, a list of supported cryptocurrencies, types of orders and trading tools, available options for the margin multiplier (leverage), minimum deposit, etc.
3. Read the terms of service of the selected exchange, paying special attention to the sections on commission fees, debt payments, terms of liquidation of transactions and other financial issues.
4. Buy Bitcoin or any other cryptocurrency that will be used for margin trading, and transfer it to the balance of your account on the exchange.
5. For trial transactions, allocate a small portion of the deposit (up to 5%) in order to protect themselves from bankruptcy due to lack of experience.
6. When opening the first positions choose a small shoulder, for example, 2x or 3x. At the same time, the level of liquidation will be relatively far from the price of entry, and therefore the risk of loss of funds is not so great.
7. Use stop loss on the basis of fixing no more than 20–30% loss.
8. Trade only those cryptocurrencies for which you are familiar with charts, i.e. with some probability you can predict further price movement.
9. Avoid opening deals in periods of excessive volatility and uncertainty in the market.
10. Choose a margin trading instead of the classic one, if there is a high chance of “catching a wave” of an established trend to rise or fall, during which the price reversal is unlikely.

Of course, the recommendations described do not guarantee that your first experience in margin trading will be extremely successful. However, over time, they will help develop your own strategy with minimal risk and decent profitability.

Features of marginal Bitcoin trading

Choosing Bitcoin as a target asset for deals with leverage, it is worth remembering that this is the most popular and at the same time the most volatile cryptocurrency among those present on the exchanges with the support of this type of trading. More saturated with artificial dumps / pamps of graphics than Bitcoin, you just can not find.

Of course, there are also accidents, but most of these “helicopters” are manipulations that are carried out to make the exchanges profit on the liquidation of user positions. Therefore, the risks when trading with the main cryptocurrency leverage are particularly high, which should be taken into account.

Otherwise, the margin trading bitcoin is no different from similar operations with other assets and may well become a profitable way of earning, subject to compliance with the above recommendations.

Cryptocurrency exchanges supporting trading with leverage

The most popular cryptobirds that can be considered for margin trading include:

• Binance (trading with leverage only for verified users, six cryptocurrencies in several variants of trading pairs, the maximum multiplier is x3, a separate margin account);
• Huobi (many trading pairs, only futures contracts, the minimum transaction value is $ 100, leverage is 1–5x).
• Bitmex (8 cryptocurrencies, changing leverage “on the fly”, the minimum transaction is $ 1, termless and futures contracts, multiplier – up to x100, frequent “helicopters” and “brakes” of the engine, verification is not needed);
• Gate.io (minimum transaction – $ 100, verification, maximum leverage – 3x, several dozen supported cryptocurrencies);
• Bitmax (shoulders – 3x, 5x or 10x, verification is optional, marginal account, a wide choice of trading pairs);
• Bitfinex (several types of orders, leverage – up to 3.3x, initial margin – at least 30% of the transaction);
• Kraken (8 cryptocurrencies, leverage up to 5x; for open transactions, a commission of 0.01–0.02% is charged every 4 hours);
• Poloniex (about two dozen cryptocurrencies, mandatory verification, leverage – up to 2.5x).

Deciding to try yourself in the marginal cryptocurrency trading on any of the listed exchanges, it is important to remember that unlike standard trading, where any unforeseen movement of the course you can often just wait out, here a long-term drawdown will actually mean a loss of deposit

Therefore, it is worth starting such speculations only if you are able to seriously approach risk control and the formation of a trading strategy, as well as are morally prepared for potential losses in advance. Only with this approach will it be possible to extract a stable benefit from the trade in cryptocurrencies with leverage.

Publication date 07/22/2019
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