Cryptocurrency trading is on its peak with various new crypto variants coming into play.
The present-day challenge being faced by all investors of cryptocurrency is that they all have limited cryptocurrencies. The prices of cryptocurrencies keep on changing every minute, and sometimes we can also say all the decision takes are not constant and favorable.
However, if this is something that you are worrying already, then you might want to consider as an option, margin trading. Margin trading is also offered by all cryptocurrency exchange platforms that exist across the world. However, margin trading also has a significant risk, and you should only be dealing with it if you understand the roots of the crypto.
What is Margin Trading?
Opening your position with leverage is known as Margin Trading. And when you take money on loan using which you want to trade is called leveraging. So, when a lender loans you the crypto, for the cryptocurrency trading then they will make money from the interest they charge you apart from the amount you have been loaned. This is simple as the procedures are the same as our conventional financial institutions.
Also, leveraging usually is expressed in the form of the ratio. For example, you have a 5:1 leverage ratio, you can hold a position which is more than five times the value that you have, and this can help you trade in 5 times the amount you have as well.
Margin Trading can be done in the following ways-
- Short Selling- By short selling, you can sell your cryptocurrency in advance and repurchase them when the prices reduce.
- Extended position- While taking an extended post, you technically end up gambling. It is betting on the costs of the cryptocurrency, especially of the value going up.
A few more strategies you can apply while margin trading is to include hedging and speculation.
The Dangers of Margin Trading:
As mentioned above, margin trading can cause considerable risk to you. Hence when you are indulged in margin trading as a strategy, you should keep the following things on your mind-
- There are costs involved as you will be required to pay the interest on the loans that you take to engage in margin trading. Also, you need to pay a considerable amount of fees that you will be given to open your position at the cryptocurrency exchange platforms.
- During margin trading on cryptocurrency exchanges, you will only be allowed the trade on amount that you hold personally. This platform does not let you lose the money that you borrowed. The exchange is “called off” in your trade once you reach the limit of your amount.
Let us take, for example; you invest $100 to open your position on any given cryptocurrency exchange. You have a leverage of 4:1 meaning that you can $300. This way you can buy $400 worth of cryptocurrency. The condition here is that it does not matter whether you make a profit or loss, but you will have to pay back with the $300. And also pay fees plus along with the other interest.
Is Margin Trading with Cryptocurrencies Profitable?
You may doubt that if one has to go through all this trouble, is it even worth it? The answer to this is “Yes.” Margin trading of cryptocurrency is highly profitable. You should, however, keep a few considerations in your mind that will ensure that margin trading becomes useful for you.
- Always keep in mind the interest rates that you are going to be charged with. It is true that you will have to pay interest rates on any sort of amount you borrow from a lender. However, keep in mind, especially if you are new to margin trading that these amounts do not have to be exorbitant. If you end up paying excessive amounts as interest, you will have no profit. Interest rates in margin trading are calculated daily and according to how much you want to borrow. So you can calculate the amount and have an estimate with you even before dwelling into taking loans.
- The margin you have available for trading is for quite long. Your profits depend on how much of a margin you get for trading. You can go into margins that can get you profitable amounts along with the benefits; however; they will also increase the risk your amount will be carrying in case if it does not pan out.
- Always remember the value of crypto currency before you invest them. Your profit and loss depend on one two currencies, the one you have invested with and the other investment on.
Only when you trade with the consciousness, you can make some profit in margin trading. You can also consult some platforms before you get in the deal.
Margin Trading is highly profitable but also carries with it risk. This trading works with the money that you can take on loan. Therefore, if there is a day that the market is not in your favor, you could end up losing a lot and may even end up in debt.