Cryptocurrency Margin Trading Explained (Beginner’s Guide)

There is no doubt that the world is the grip of Bitcoin-fever.

With everyone seemingly having a dabble in investing and trading with Bitcoin, as well as other cryptocurrencies, there has never been a better time to get involved in this potentially, highly lucrative market.

It seems that everyone seems to be making a fortune investing in and trading with Bitcoin and more and more people are taking it up.

But did you know that there are different ways of trading your currencies and different ways of making a profit?

One of these methods is cryptocurrency margin trading, and once you get to grips with it, it’s one the most effective and profitable way to invest.

In this article, we will give you a full overview of margin trading; how to do it, where to do it, the pros and cons, and of course, the best exchanges for you to margin trade on.

Imagine if you could double, or even triple what you hold, without having to have more capital to invest in the first place?

Margin trading offers you this possibility without increasing the risk of what you might lose, should you be unlucky.

If you are looking to up your game when it comes to cryptocurrency buying, selling, and trading, then margin trading could well be worth a go.

Cryptocurrency Margin Trading Explained

What Do You Need For Cryptocurrency Trading

In it’s purest form, margin trading is a type of trading which involves the borrowing of funds.

It allows traders to bet a more substantial amount of currency than they would if they were just trading what they hold.

If for example, a trader has a limited amount of Bitcoin, they have the opportunity to margin trade to add further leverage to their investment. This increases the amount that is invested, without having a prerequisite to holding the assets in the first place.

In the case of Bitcoin margin trading, it allows the trader to open their position with what is known as leverage.

An example of this would be an individual opening a margin position of 2 x leverage which means that should the value of Bitcoin assets increase by 20%, this individual would yield 20% of this increase, due to the 2 x leverage.

Margin trading is made possible by the fact that the lending market exists. Lenders offer loans to traders which allow them to invest more substantial amounts of coins and yield larger rewards.

There are two types of exchanges-  where other users provide the loans, or where the exchange itself provide the loan.

Difference Between Trading and Margin Trading

The main difference between regular trading and margin trading is quite simple.

Regular trading involves enacting transactions such as purchases and sales, using only the assets that you have available to you. For example, if you have 1 BTC or $1 only in your trading account, you can only trade with that amount of currency, and your return will then be based on just the amount you have traded.

Margin trading is entirely different as it allows you to trade and speculate on trades with an amount that exceeds the assets that you hold. By using a leverage ratio, you can increase your returns by “borrowing” money from users or the exchange you are using, and increasing how much you trade.

There is, of course, a cutoff point that means if you are losing, you only lose what you initially held, and you do not lose any of the funds that you have invested.

This is the difference between trading and margin trading – traditional trading means you are trading with assets that you hold and that belong to you.

Margin trading involves you betting on a specified increase of what you own, using assets borrowed from elsewhere. This allows you to multiply your returns, should your trade pay off.

How To Start Margin Trading

The best cryptocurrency trading platforms

To start margin trading, first of all, you need to find an exchange that will allow you to trade in this way.

#1 Look For a Reputable Exchange

There are plenty of them out there (we will discuss some of the best ones a bit later on) and picking one that suits you, will come down to your personal preference. Just be sure to do thorough research before you take the leap, and make sure that your exchange of choice is a reputable one – you can establish this by reading user reviews of which there are plenty of online.

#2 Fund Your Account

Then you need to populate your account with funds, again how you do this will depend on whether you want, or the platform wants you to invest with cryptocurrencies or fiat currencies. Still, there are various options out there, it is just a matter of finding the one that suits you.

#3 Pick a Trading Pair

Once you have populated your account with funds, you need to pick a pair to trade. You can choose from cryptocurrencies or fiat currencies, but make sure that you research adequately and pick a pair that you think will offer you the best returns.

Then you need to consider the margin that you wish to trade on as well as various limits, order types, and of course the amount you want to trade on.

A word of wisdom for beginners is to start small. Start with a small margin, and a little investment and stick to safe bets when it comes to trading pairs. As you get more experienced with trading, you can progress to taking more significant risks.

The Pros and Cons of Bitcoin Margin Trading

As with every aspect of cryptocurrency trading, there are risks involved, and no actual guarantees of success.

One of the drawbacks to margin trading is the fact that the cost of trading with a margin position means that you are liable to pay interest on the coins that you are borrowing (regardless of whether you borrow from an exchange or an individual).

You also need to remember that as the chance of earning more increases, so does the risk of losing it all.

The maximum amount of assets you can lose is the amount that you invested in ordering the position, and this is what is known as the liquidation value.

This is the value that the exchange would use as an indicator to close your position automatically so that you do not run the risk of losing any of the loaned money. Should you lose on the investment, you can only lose the money that you invested – not the money of others.

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An example of this would be that if we are talking about the leverage of 1:1, the liquidation value is when the position that you hold reaches zero.

As you increase the leverage that you trade on, the liquidation value will get closer to the buying price. An example of this would be; if the value of Bitcoin is $1000 and you purchase one Bitcoin on a leveraged position of 2:1, then the cost of your position is $1000, but you have also borrowed $1000 to increase the amount of your investment.

The liquidation points of your position would sit at around $500, and this would be the level you lose exactly the amount you have invested yourself -$1000- plus the interest and fees accrued.

How To Leverage Trade On Exchanges

How you trade on exchanges will depend on the process for each exchange.

You will have to deposit funds into your account, pick a trading pair, decide on the margin and leverage that you want to trade on, and then be prepared to bide your time for the right moment to activate your trade.

Thankfully, there are lots of guides out there, particularly on the exchange FAQ sections that can help guide you.

Be aware that margin trading is a little more complicated than regular trading, and one should be sure to do their background work before jumping in at the deep end.

The Best Cryptocurrency Exchanges For Margin Trading

If you decide that margin trading is for you, you will find that most of the main exchanges offer it as a service. These are some of the best:

Bitfinex

cryptocurrency margin trading bitfinex

Bitfinex is one of the worlds biggest and most advanced cryptocurrency exchanges. It provides users with the ability to margin trade in Bitcoin, Litecoin, and Ethereum and various other cryptocurrencies and fiat currencies.

It allows traders to trade with up to 3.3x leverage and it enables users to receive their funding from the p2p margin funding platform.

It also offers traders the choice to either borrow via the platform, or to open a position and let Bitfinex take out funding for them at the best currently available rate.

Binance

cryptocurrency margin trading binance

Binance is a coin to coin only exchange which facilitates the trading of Ethereum, Bitcoin, NEO, and Litecoin.

It is capable of processing over 1.4million orders a second, making it one of the fastest in the world.

Its margin trading features are in its infancy, so while we recommend keeping your eye on it, maybe look at some alternative options while it finds its feet.

eToro

cryptocurrency margin trading eToro

eToro has been a big player in the world of cryptocurrencies for quite some time now.

With a minimum transaction size of 1000 units after leverage, and leverage ratios from 1:2 to 1:4 it also offers spreads of 2 pips and quotes on all major currencies.

It also offers guided tutorials for beginners, live training and great economic news, charts and technical analysis.

eToro is also known for its convenient withdrawal and deposit methods, as well as offering plenty of ways to get in touch, should you need assistance.

CEX.IO

cryptocurrency margin trading CEX.io

CEX.IO is another industry leader, and it offers traders margin trading between 1:2 and 1:3 leverages on BTC/USD, BTC/EUR, ETH/BTC and ETH/USD pairs.

It also allows automatic borrowing of funds, and you don’t have to go through the hassle of opening an extra margin account to trade with leverage.

It operates a negative balance protection system which prevents traders from ending up in the red, should a trade go the wrong way. The system also reserves part of the order book so that the position can be closed at the exact price, not worse.

Another benefit is that the rollover fee is only ever charged while the position is open, and it is not applicable for the first four hours.

CEX.IO is an excellent all-around exchange that offers pretty foolproof margin trading. It has a sterling reputation to boot and is simple enough for even beginners to get to grips with.

Final Thoughts

Margin trading is an excellent way of increasing your return, without having to put up all of your capital in the first place.

While it does carry risks, should your trade pay off you are set to bank a considerable amount.

One bit of advice though – don’t just jump into margin trading if you are a total novice, it is complicated to understand, and when it comes to parting with your assets, you need to be entirely sure of what you are doing.

Luckily, there is lots of help at hand, and some of the better exchange even offer you live guidance to help you along your way.

The most secure and trusted platform to start from is undoubtedly eToro – it’s an industry leader for a reason and it might soon offer cryptocurrency exchange and wallet.

If you are considering getting into the world of cryptocurrency trading, then cryptocurrency margin trading is most definitely something that you should consider doing, once you get to grips with the fundamentals of the market.

Remember that in cryptocurrency of fiat currency trading there are no guarantees, so never invest more than you are prepared, or can afford to lose. Do your research, hedge your bets, progress slowly, and you are sure to reap some rewards from the exhilarating world of crypto-trading.

For more information, visit our Trading Page.

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Megan is a self-taught blockchain enthusiast. She enjoys combining finance with technology, from a less-techy perspective. BiteMyCoin is her most recent project underneath the umbrella of an international digital marketing agency ANCHOVY.
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