The pace of leveraged crypto margin trading has reached new highs in 2021. The prices of cryptos were very high in April, resulting in massive profits for traders. Prices soon fell again and it was not the same – important link!
No matter how well are at market research or the skills you possess however, borrowing money is risky. It’s crucial to know the risk of margin trading.
What is margin trading?
Margin trading involves trading with borrowed funds or leveraged funds. To get a loan you’ll need the collateral or margin first. It’s similar to a bank money deposit, which is managed by your exchange until you’ve paid the amount of the loan. As per the regulations of the crypto exchange you can take out times the amount of capital that you’ve locked in. Leverage refers to the ratio between the amount you put into the account and what you can withdraw.
To allow leveraged trading on the traditional market, traders must interact with the brokers. Margin trading is more convenient with cryptocurrency. The platforms that lend leverage are available to anyone, making the process easier. Leverage trading could lead to more profits, however it can also lead to higher losses.
How do margin trades work?
Leverage trading in Bitcoin or other cryptocurrency allows traders to increase the profits they earn by more than 100x. BitMEX is among the top platforms that provide trading with leverage to traders for different cryptocurrencies.
Margin trading positions are classified into two different categories where one is long, and the other one is short. In a long-term position, the trader buys an asset at a cheap cost with the intention of selling it later at a higher value. On the other hand it is quite the opposite. The buyer sells the product in the hopes of acquiring it back later for the lower price.
The trader earns money in both instances due to the difference between the prices of the digital assets at the time when they open and close a position.
Let’s look at this using an example
If you were looking to invest $10,000 in any cryptocurrency like Bitcoin at the leverage ratio 1:10 and a margin of 10 percent, you’d require to invest $1,000.
With unleveraged crypto trading, it is necessary to invest $10,000. That’s an enormous amount more. However, if prices of Bitcoin increases the profit margin will be identical.
That is, when leveraged trading Bitcoin, much less capital is required upfront to make the exact same profit. Of course, it’s worth bearing in mind that the reverse could be applicable if the cost of Bitcoin would decrease.
If you believe that the value of Bitcoin to increase within the next few months. You could benefit by opening the position in a long-term manner at 10x leverage with a $1000 margin. The position is then equated to $10,000. Earnings of $1,000 result from a 10% increase in BTC price (minus associated fees).
The return on equity (ROE) of the stake which is the amount of profit and margin will be 100%. Without leverage, your earnings is only $100 at an ROE of 10 percent. Isolated Margin and Cross Margin
BitMEX utilizes two methods to facilitate margin trading:
Cross Margin
Isolated Margin
It is possible to switch between two options on the exchange platform by changing the slider for leverage in the box labelled “Your Position” which is located just to the left of the trading section.
You can use cross leverage by shifting the slider left. Alternatively, you may use isolated leverage for the other numbers as (2x 3x, 5x or 5x.)
Keep in mind that the isolated leverage doesn’t multiply your position automatically. Once you adjust the slider, it will change the margin you can use. It is necessary to move the slider.
change the quantity manually.