A simple guide to margin trading cryptocurrency

If you want to trade cryptocurrencies but you only have a limited amount of capital to work with, you may want to consider a tool known as margin trading. By borrowing money from a cryptocurrency exchange or broker to increase your buying power, margin trading offers the potential for greater profits.

Of course, it also comes with a high level of risk attached, so let’s take a closer look at the key margin trading facts you need to understand before opening a position.

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What is cryptocurrency margin trading?

The simplest explanation of margin trading is that you are trading cryptocurrencies using borrowed funds. It involves borrowing capital at relatively high interest rates from a cryptocurrency exchange so you can access increased leverage. This allows you to access increased profits if the market moves in your favour, but also comes with the risk of increased losses.

As a very basic example, let’s say you want to buy a cryptocurrency that you’re confident will increase in price. However, you only have $1,000 to spend in your trading account, and you know that if you had more capital to work with, you could enjoy a bigger profit.

With margin trading, you borrow against the funds you already have in your account. So if you borrowed an extra $1,000 from the exchange, you would then have a total of $2,000 to put towards your purchase, potentially doubling your profits if the price moves in your favour.

Where can I trade cryptocurrencies on margin?

Several popular cryptocurrency exchanges as well as CFD platforms now offer margin trading to their customers. Check out the table below for details of the services, features and fees some of these platforms offer.

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Name	Product	Payment Methods	Supported Fiat Currencies	Cryptocurrencies	Minimum Deposit
Bitfinex Professional Trading Exchange		Wire transfer, Cryptocurrency	USD, EUR			Cryptocurrencies are a highly volatile investment product. Your capital is at risk. Spot trade all of the major cryptos on this full-featured exchange and margin trading platform.	Go to site	Compare	loading Fetching your data...

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How does it work?

To understand margin trading, you’ll first need to understand the concept of leverage. Leverage refers to the increased buying power you have when you trade cryptocurrencies on margin. The maximum leverage you can access differs between exchange platforms, and you’ll typically see it expressed as a ratio, for example 5:1 or 20:1.

For example, if a platform offered leverage of 2:1, you could open a position worth twice the value of your trading account – in other words, if you have $10,000 in your account, you can place a trade worth up to $20,000. If the maximum leverage was 20:1, you could open a position worth 20 times your account balance.

As a result, if the market moves in your favour, your gains will be magnified by the amount of leverage selected. Conversely, losses are also magnified if the market moves against you.

How to margin trade – going long vs going short

There are two options when opening a margin trade:

• Going long. Also referred to as opening or entering a long position, this is when you buy a cryptocurrency in the belief that its price will go up. The aim is to use leverage to benefit from increased gains if the price rises as you predict.
• Going short. Also referred to as opening or entering a short position, this involves selling a cryptocurrency to bet that its price will go down. The aim is to then purchase that crypto back once its price has dropped and profit from the spread.

How is cryptocurrency margin trading different to regular trading?

The traditional method of trading crypto is to buy and sell digital currencies on an exchange using your own funds. You buy coins or tokens at the current price and then hold them until the price (hopefully) rises, either over the short- or long-term, so you can sell them for a profit.

The key difference with margin trading is that you borrow money from an exchange to increase your buying power, providing the potential to access higher profits.

What are the benefits of cryptocurrency margin trading?

The main advantage of margin trading is the potential for larger gains. If the market moves as you expect and your price prediction is correct, your profits will be increased – for example, if using leverage of 2:1, you’ll receive double the gains. If you’re an experienced trader with an in-depth knowledge of cryptocurrency markets and risk management, margin trading can be an effective trading tool to help you build a bigger balance.

What are the risks?

While margin trading can amplify your gains, it can also amplify your losses. This is the biggest risk you need to be aware of before you even consider trading on margin since it’s possible to lose your entire balance.

Exchanges always require traders to maintain a minimum level of equity in their account, for example 30% of the open position. If your balance falls below this minimum margin requirement, for example if the market moves in the opposite direction to the one you predicted, you’ll have to add more funds to your account to avoid liquidation – this is known as a margin call. If you can’t provide the necessary funds to keep an order open, it will be closed automatically.

It’s also worth pointing out that any money you borrow to fund a margin trade doesn’t come free. You’ll need to pay interest on the amount you borrow as well as repay the loan amount. You’ll also need to pay attention to the platform’s trading fees as well.

Margin trading tips

Keep the following tips in mind if trading with a margin account:

• Only for experienced traders. If you’re new to trading or new to the world of cryptocurrency as a whole, margin trading probably isn’t for you. It’s a highly risky approach that’s best suited to experienced traders.
• Start slowly. To minimise risks, it’s often a good idea for new margin traders to start by using a low level of leverage and to avoid using all your funds in one transaction.
• Manage risks. Utilising stop-loss and take-profit orders allows you to set clear limits for closing positions and can help prevent problems.
• Margin trading criteria. Some exchanges only offer margin trading to customers who meet a range of criteria, such as ID verification or being able to access a specified amount of capital. Remember to research any qualification criteria that may apply before choosing an exchange.

If you’re an experienced trader and you’d like to margin trade cryptocurrency, start by doing plenty of research. Compare the fees and features as well as the pros and cons of various margin trading platforms to find the one that’s right for your needs.

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