Not everyone has the same financial capacity to purchase cryptocurrencies. However, with margin trading, it is possible for you to make spot purchases and sell your cryptocurrencies by using funds from a reliable broker that exceed the amount in your account.
While this trading strategy is risky, it has gathered adoption among enthusiastic traders. How does it work? What are the potential risks and benefits you might be exposed to? Don’t worry, this guide will provide an insight into all these questions. Just keep on reading!
What is Margin Trading?
Simply put, margin trading involves borrowing capital from a broker to boost your purchasing capabilities. When compared to regular transactions, margin trading can allow you to access a larger amount of money.
When there is positive movement in the market, margin trading can expose you to greater results than regular trading can.
How Does It Work?
Trading cryptocurrencies can be carried out on various exchanges. Many of them act as brokers, from which traders can borrow funds. Before you go deep into margin trading, it is essential that you acquaint yourself with this trading strategy.
As a trader, when you initiate a margin trade, you are required to commit a fraction of the total order value, known as the margin. Margin trading accounts can help in creating leverage trading, which measures the ratio of the borrowed funds to the margin.
Take, for instance, you wish to open up a crypto trade that is worth $50,000 at a 5:1 leverage. Then, you would be required to deposit $10,000 of the capital.
This advanced trading strategy involves entering into spot transactions by adopting margin, which can help in multiplying your gains or losses from market fluctuations. Various crypto exchanges allow traders to go long (buy) or go short (sell) a wide range of cryptocurrencies with up to 5× leverage.
Potential Benefits of Margin Trading Crypto
Margin trading is a trading strategy that is adopted due to several benefits that are associated with it. Some of these are introduced as follows:
Invest with little capital
It is safe to affirm that all traders have different trading capacities. To trade cryptocurrencies, including tesla coin, on a reliable crypto exchange, you can borrow funds with little capital to kickstart your trading journey.
Potentially amplifies your profits
As your purchasing capacity increases, so do your potential profits. This implies that for a positive swing in the crypto price, you can make greater profits than you would in regular trading since you are purchasing more than you would without leverage.
Insurance Funds can be available
An insurance fund ensures that your account is protected when your equity is lower than 0 or the assets of the pledged currency borrowing orders are insolvent.
Potential Risks of Margin Trading Crypto?
Margin trading is similar to a double-edged sword, capable of amplifying your losses to the same extent it can multiply your profits. When there is a negative swing in the market price, the loss you incur is higher than without margin trading.
In some cases, the extent of loss might be so great that after exhausting the cash at hand during the transaction, you would still end up owing the broker! It all depends on how high the leverage is. Generally, the higher the leverage, the greater the risk you are exposed to.
Conclusion
Margin trading in cryptocurrencies is an advanced trading strategy that allows you to carry out crypto trading with more funds than you can in regular transactions. Your profits, as well as your losses, can be potentially amplified. However, there are various risk management tools you can adopt to minimize your exposure to risks during trading.