Digital currency is growing and expanding its claws at a scintillating pace. Especially in the last couple of years, several new coins and tokens have almost flooded the market. The awareness and interest of people in crypto are also at their all-time high and still going up.
One of the aspects of crypto that has caught the attention of investors is margin trading. With plenty of information available on websites, exchanges, social media, etc. people are increasingly learning about it. You can Click here and easily explore the nuances of this domain.
So what is it that is propelling masses toward margin trading? The answer is the ability to open large trades with the help of borrowed money. It also allows traders to sell it short while considering the asset’s long view. Margin trading with adequate research, effectiveness and risk control proliferate your profits for the same capital.
- Understanding crypto margin trading
In simple terms, margin trading is a strategy wherein you acquire assets by investing an amount borrowed from the third-party/broker.
To leverage your position, you get access to a larger sum of the outstanding capital. While this type of trading is prevalent in low-volatility markets that are more predictable, it is increasingly getting popular in other markets including stock, commodity, and crypto.
Given the highly volatile nature of the crypto market, margin trading involves high risk in this space. Traders need to be cautious and new entrants should think several times before diving into it.
You can assess the risk by identifying trends, determining entry and exit points, and interpreting charts. However, to be able to leverage margin trading you need extensive spot trading experience and intense comprehension of technical analysis.
- The basics: Definition, purpose, utility
As defined above, margin trading is a concept that enhances your buying power by allowing access to a larger capital.
You open a position by depositing an initial margin to the exchange and have to keep a certain balance to maintain the position. Then you can get another type of capital from the platform by providing some capital and earning profits from it.
The capital that the platform allows you to leverage for trading can vary from one platform to another and also depends on your deposit.
- Understanding margins and leverages
The percentage of the total order that you have to commit is called margin. Simply put, the margin is the loan that your crypto exchange grants so that you can place bigger trades. This margin is collateralized by the deposit in your account, You need to pay it back along with the interest.
Leverage, on the other hand, is the borrowed sum that you use to conciliate the difference between your total order and margin.
- The positives and the negatives
Let us begin with the pros first.
- The biggest advantage is that it increases your investment power. You can open multiple positions with relatively smaller capital.
- Most platforms allow you to choose the leverage amount that suits you.
- Crypto margin trading also boosts your profit potential.
The biggest disadvantage is, that if your trade fails, you still have to pay back the margin with interest. For that reason, risk analysis is extremely crucial.