Bitcoin and many other cryptocurrencies are popular for the volatility because that sees their prices fluctuate like substantially in a small duration of time. If you’d stepup cryptocurrency world and make your market into the business opportunity to make a profit, you may prefer leverage trading or margin trading.
What is margin or leverage trading?
Leverage is nothing but it is essentially borrowed funds that increase a trader’s position size and its market exposure, thus its profitability.
Sometimes referred leverage trading is known as margin trading (the two are often used interchangeably), leverage trading involves borrowing funds to amplify potential returns when buying and selling bitcoin and any cryptocurrencies. When you are in cryptocurrency leverage trade, you can access increased buying power of cryptocurrencies and may open positions that are much larger than your actual account balance.
How does margin trading works?
The term ‘leverage’ refers to how much the position was increased by, for instance, 100x (or 1:100) leverage will increase a $500 Bitcoin position to be as big and as profitable as a $50,000 Bitcoin position.
Using this same example, a trader’s initial investment ($500) is referred to as the ‘margin’ .
Margin trading can be used to open both long and short positions.
A long position reflects an assumption that the price of the asset will go up, while a short position reflects the opposite. While the margin position is open, the trader’s assets act as collateral for the borrowed funds. This is critical for traders to understand, as most brokerages reserve the right to force the sale of these assets in case the market moves against their position (above or below a certain threshold).
For instance, if a trader opens a long leveraged position, they could be margin called when the price drops significantly. A margin call occurs when a trader is required to deposit more funds into their margin account in order to reach the minimum margin trading requirements. If the trader fails to do so, their holdings are automatically liquidated to cover their losses. Typically, this occurs when the total value of all of the equities in a margin account, also known as the liquidation margin, drops below the total margin requirements of that particular exchange or broker.
Benefits of using leverage trading
Magnified profits: You only have to put down a fraction of the value of your trade to receive the same profit as in a conventional trade with any other exchange.
Gearing opportunities: Using leverage can free up capital that can be committed to other investments. The ability to increase the amount available for investment is known as gearing
Gaining from the market fall: Using leveraged products to speculate on market movements enables you to benefit from markets that are falling, as well as those that are rising.
Leverage Calculator: Leverage calculator allows you to calculate the total amount of buying power that you will get on the PrimeXBT platform based on your capital
Features of Margin Trading:
- Perpetual Contracts
- Auto Deliveraging
- Risk Management
- Partial Close Trades
- Trading Bonus
- Affiliate Marketing
Advantages and Disadvantages of Margin Trading
- The most obvious advantage of margin trading is the fact that it can result in larger profits due to the greater relative value of the trading positions.
- Other than that, margin trading can be useful for diversification, as traders can open several positions with relatively small amounts of investment capital.
- Finally, having a margin account may make it easier for traders to open positions quickly without having to shift large sums of money to their accounts.
- For all its upsides, margin trading does have the obvious disadvantage of increasing losses in the same way that it can increase gains.
- Unlike the regular spot trading, margin trading introduces the possibility of losses that exceed a trader's initial investment and, as such, is considered a high-risk trading method.
- Depending on the amount of leverage involved in a trade, even a small drop in the market price may cause substantial losses for traders.
- For this reason, it's important that investors who decide to utilize margin trading employ proper risk management strategies and make use of risk mitigation tools, such as stop-limit orders.
For investors who do not have the risk tolerance to engage in margin trading themselves, there is another way to profit from the leveraged trading methods. Some trading platforms and cryptocurrency exchanges offer a feature known as margin funding, where users can commit their money to fund the margin trades of other users.
Usually, the process follows specific terms and yields dynamic interest rates. If a trader accepts the terms and takes the offer, the funds' provider is entitled to repayment of the loan with the agreed upon interest. Although the mechanisms may differ from exchange to exchange, the risks of providing margin funds are relatively low, owing to the fact that leveraged positions can be forcibly liquidated to prevent excessive losses. Still, margin funding requires users to keep their funds in the exchange wallet. So, it is important to consider the risks involved and to understand how the feature works on their exchange of choice.
Where to start cryptocurrency exchange with leverage trading?
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