Bitcoin Margin Trading: What Is It About?

Bitcoin Margin Trading: What Is It About?

18/07/2022

Generally, trading cryptocurrency is not so hard. However, you might be looking for more advanced options. In this case, margin trading is worth considering. You could leverage both short- and long-term positions on Bitcoin- and other cryptocurrencies – without the need to hold the required capital for opening such positions.

Margin trading is a double-edged sword. For this reason, a deep understanding of how it works is very important. To lend you a hand, this comprehensive guide will provide you with all you must know about Bitcoin margin trading. So, don’t stop reading.

Meaning of Bitcoin Margin Trading

In simple words, Bitcoin margin trading is a strategy that ensures that traders can open a trading position by leverage, which involves borrowing funds from an exchange. When you borrow funds from a trading platform, you can magnify your returns on investment while increasing your purchasing power if there is a positive movement in the cryptocurrency price. 

How Does Bitcoin Margin Trading Work?

How Does Bitcoin Margin Trading Work?

Trading in leverage is not bad to consider, especially if you get yourself familiarized with the risks. Yet, if you find it hard to know what you are doing, it can expose you to a higher level of risks than you can afford to. 

Trading Bitcoin on margin can help you buy the cryptocurrency by using funds that are borrowed by an exchange. An example will illustrate this better.

If you opened a Bitcoin margin position with a 3× leverage and Bitcoin’s price experienced a 15% increase, then the position would have returned a 45% profit due to the 3× leverage. However, without this leverage, the ROI would just have been 15%. 

Furthermore, margin leverage can also be as high as 25× or high. With the same position, as explained earlier, you would have gained 250%, rather than 10% with no leverage.

In addition, it must be noted that the advantages of margin trading are only matched by its downsides. What this means is that the loss you can experience from a negative price movement can match the gain from a positive price movement if the same position is maintained.

For instance, with a 3× leverage and a 15% fall in Bitcoin price, you experience a 45% loss, rather than just a 15% loss without leverage. With this in mind, it is clear that leverage trading can magnify your profits the same way it can multiply your losses, making it a risky trading strategy.

Margin Trading Tips

It has already been established that margin trading is a risky strategy. For this reason, it is not ideal for beginners in Bitcoin trading to embrace. While profits are not guaranteed in Bitcoin margin trading, some tips might be very helpful. Some of these are introduced as follows:

Always start trading with small amounts

Are you a first-timer in margin trading? If so, it is always advisable to start small. As explained earlier, the level of risks increases with higher leverage. For this reason, besides understanding the basics of margin trading, you must gain the necessary confidence before you go deep. 

Don’t go all-in at once

You should divide your position into portions if you are not so sure about your trading skills. With this, you can minimize the risk. This is also the case when it comes to making profits. 

Understand fees and liquidations

Before you jump into the trades, ensure that you are aware of the number of fees – and the kind of fees – that you are paying. Bitcoin margin trading comes with certain fees. You must ensure that you fritter away your profits. The same applies to the liquidation price.

Risk Management

By trading on margin, it is important to fix obvious rules of risk management. This helps you avoid excessive greed. You can consider the amount of funds you are willing to risk while noting that it can be completely lost due to the volatility of Bitcoin. You should determine levels for closing positions, stop-loss levels, and profit levels.

Short-term trading

Just like other cryptocurrencies, Bitcoin is considered to be highly volatile. The risk that is associated with crypto trading is magnified by margin trading. As a result, you should consider short-term trading leveraged positions. Besides this, the fees on margin trading can be significant over a long period, even though the daily fees are negligible. 

Final Words

The crypto market has grown dramatically over the years. This has resulted in various trading strategies, including margin trading. Bitcoin margin trading is a double-edged sword: adopting it can increase your loss to the same extent it can magnify your profits. For this reason, you should understand how it works and the tips that can help you understand this strategy better.

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