Margin Trading: A Detailed Definition & Guide

Jump to page contents

Margin Trading: A Detailed Definition & Guide

As an experienced cryptocurrency trader or investor, you’ve probably already heard the term margin trading. So far, you have had to use your own funds to speculate, but what if you could amplify the amount you trade, in order to generate a higher return, faster? This, in essence, is the definition of margin trading.

Margin Trading Basics

Margin trading occurs when a crypto trader borrows funds from either a broker or an exchange to be able to purchase more digital assets. Several exchanges offer this service, including CEX and Kraken. Therefore, margin trading is similar to a short term loan, with the sole purpose of purchasing cryptocurrency.

This practice has been around for decades, used in traditional markets. Whilst the rules differ between industries, crypto margin trading is considered to be simpler and faster. When you start margin trading, depending on the broker or exchange you use, you will be required to put up the funds in your account as collateral. Once you sell the assets bought through margin trading, the proceeds are settled at the exchange or broker until the loan is fully paid off.

Earning a Profit

Not all cryptocurrencies can be traded marginally, and Bitcoin is, by far, the most popular currency for this practice. Exchanges obtain the funds necessary from the loan from various sources, including from other users who accept to loan out their own funds in exchange of interest. This is just one of the many ways users can earn a profit with crypto.

Traders must decide whether they believe that the value of the currency will rise or fall, and take a long or short position respectively. In order to assist traders, the best exchanges offer detailed charts and data. Another great tool is to follow cryptocurrency news.

A Practical Example

Imagine you plan to buy Bitcoin with Bitmex and because you believe the value of the currency will rise. You, therefore, open a long position on margin for €5,000 with 10:1 leverage. This leverage means you only need to provide €500 to make the €5,000 purchase. If your belief proves to be correct, and the value of Bitcoin rises above your purchase price, you get to hold all of the profits, minus the margin trading costs.

However, should the price fall up to a pre-determined position, the Bitcoin is sold and you lose your €500, but that’s all you lose. The higher the leverage (40:1 instead of 10:1), the easier to lose an investment, as there is less of a buffer if the price goes in the opposite direction than you predicted.

A Final Word of Caution

Margin trading is an exciting next level for any experienced cryptocurrency trader, however, you should not simply dive in. Start small, by investing a portion of your capital and by using top-notch exchanges. Opt for trades with smaller leverages and be ready for a learning experience where you might lose some or all of your funds.

Recently Similar Guides

trueflip-promotion bitamp-promotion

Latest Guides

Bitcoin,Casino,Cryptocurrency,Gambling

The Next Big Cryptocurrency

Will There Ever Be A New Bitcoin? Bitcoin is the first iteration of blockchain technology and cryptocurrency to ever be created, and it is also the largest cryptocurrency by market capitalization, worth over 170 billion dollars. After more than 10 years from Bitcoin’s date of inception, there is now well over 5500 unique cryptocurrencies, hundreds […]

10 August, 2020
Cryptocurrency,Trading

What is Futures Trading?

If you ever hear about fictional characters wheel and deal over futures, you must be familiar with the phrases “invest in pork bellies” or “corner the market”. The movie “Trading Places” by Eddy Murphy/Dan Akroyd climaxed over the price of a product most people forgot: frozen orange juice. How can anyone become wealthy on pre-bacon […]

5 August, 2020
Gambling,Gaming,Regulation

The Importance of Responsible Gaming

What is Responsible Gambling? Responsible gambling is one of the most important aspects of playing online as it significantly affects the way players gamble. We’ll elaborate further on this, but first things first, let’s go through what responsible gaming actually is. Not to sound too obvious, but responsible gaming is the act of gaming responsibly. […]

27 July, 2020
Bitcoin,Blockchain,Cryptocurrency,Digital Currency

What is Fiat Currency?

Fiat Currency Definition The definition of a fiat currency is any currency that is established and regulated by a government that inherently has no intrinsic value. While stores of value such as gold are considered money because of their intrinsic value, fiat currency has its buying power dictated to its users by a regulating governing authority. Fiat […]

21 July, 2020
Forex,Trading

Trade Signals

Forex trading statistics indicate that up to 90% of traders lose money, with only about 5% of retail traders having something to write home about. Nothing is more annoying than analyzing a market for hours after reading the best available resources only for the market to move against your position as soon as you enter […]

17 July, 2020
Forex,Regulation,Trading

What is Negative Balance Protection?

Forex trade and stock trade can be profitable, but they are rife with attendant risks. Situations arise where market volatility prevents you from keeping your account balanced. You can protect yourself from having a negative balance using available standard tools. An introduction to Negative Balance Protection Negative balance protection refers to a precautionary measure by […]

7 July, 2020
Bitcoin,Blockchain,Cryptocurrency,Trading

What is Litecoin?

So, what exactly is Litecoin? Litecoin is a distributed, decentralized, peer to peer cryptocurrency and blockchain infrastructure. Litecoin is currently the 7th largest cryptocurrency with a current market capitalization of $2.8 billion. Similarly to Bitcoin, and as one of the largest and most legitimate competitors, Litecoin is a store of value and digital payment ecosystem with […]

29 June, 2020
Blockchain,Cryptocurrency,Stablecoin

What Is Tether?

So, What Exactly Is Tether? Tether is a cryptocurrency based upon blockchain technology. Whilst it shares some similarities with other popular coins, such as Bitcoin and Ethereum, Tether is a stablecoin. This segment of cryptocurrencies is not as volatile as major coins and is seen as a more reliable form of payment method. The coin’s […]

25 June, 2020