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A quick note: Crypto margin trading as a tool is for experienced traders in cryptocurrencies but new to leverage based trading. I will strongly suggest absolute beginner’s head over to trading cryptocurrency for beginners.
If you have been trading in cryptocurrency for sometime, you must have reached a point where you are able to see a good opportunity? When sometimes you wish that you had more funds in your account to take maximum benefit of a good trade set up?
Do you know that you can actually do that? That you can buy coins worth two times or more than then funds you already have in your crypto trading wallet?
For example, let’s say, you have let’s say $ 500 in your wallet in exchange. You wish to take a position into a coin which, you see, is going to go up in short duration. Then you can actually buy that coin of up to $ 1000 (or even $ 5000) worth, without depositing additional funds to your account.
You don’t have to process any extra paperwork for this funding. It is available on click of few buttons, right there in your trading dashboard.
This facility is provided by the exchange itself on your dashboard where you can trade.
This type of trading is called as margin trading.
- 1 Crypto margin trading for beginners?
- 2 Crypto Exchanges providing Margin Trading Option
- 3 How to enable margin trading facility?
- 4 Pros & Cons of Margin Trading in Cryptocurrencies
- 5 Crypto margin trading for beginners – Final thoughts
- 6 Important questions related to Margin Trading in Crypto
Crypto margin trading for beginners?
In trading, margin trading is an option, where you can take buy Bitcoin or any other cryptocurrency, with funds more than the actual funds in your trading account.
In simple terms, you borrow funds from the exchange to be able to take a bigger bet on your position.
For this extra funding, you pay interest to the exchange which is deducted from your funds. I explain this part in a bit, but first, let’s focus on the math of crypto margin trading.
You take this extra risk, when you think the trade set up is in your favour and you can make bigger profit even after taking this extra risk.
Amount of leverage or margin you get for trading depends on exchange to exchange and also on your deposited amount (or current amount in your trading account wallet).
This is how it works:
You have $2500 in your trading account. You see that Bitcoin prices are about to go up (after some correction maybe). So, you use margin trading facility to buy $ 5000 worth of Bitcoin ( 2 times the original margin).
So, the it’s $ 2500 (yours ) + $ 2500 (leverage from exchange) = $ 5000
So, if you took a position in Bitcoin at let’s say 10,000 and then you hold it for 1-2 days till prices go up to 10,500 where you sell it to go back to USDT (your stable coin holding).
Once this is done, here is the maths/accounting :
Bitcoin bought = 5000/10,000 = 0.5 BTC
When you sold the same amount of BTC at 10,500, your profit will be
10,500 – 10,000 = 500 points.
This into your position size = 500 *0.5 BTC = $250
Now, before you consider this total amount as your profit, you need to deduct trading fee and interest for using fund’s money too.
The interest on margin supplied by the exchange is usually calculated on an hourly basis at daily rates. This is usually 0.02% per day.
If you were in position for 1 day, then your interest payable is
$2500 (borrowed funds) *0.02% = $ 0.5
Thus, you have $ 250 – $ 0.5 = $ 249.50 – minus trading fee (which is same both across spot and margin) as your profit.
So, on initial capital of $ 2500 that is cool ~ 10% return in 1 day.
Which means even if you do 3-4 such trades in a month, you will be earning around 30-40% of the return (provided you don’t have a losing trade).
Whereas if you used only your original capital, the return would have been around half of that at 6-8% at most.
But this is only the good part, the next half is also there:
Suppose, in the same example above, rather than making profit you had to close your trade (or liquidated by exchange) at loss.
Which means rather than 10,500, BTC prices actually plummeted to 9500. And the trade was closed.
In this case, the funds of lender are protected first, so the math is funds left:
0.5 BTC*9500(price) = $4750.
Out of this amount, 2500 + interest belongs to lender, so that goes.
4750 – 2500 – 0.5 = 2249.5 $
Which is nearly 10% loss on a single trade. So, you see margin trading is highly rewarding as well as contains high risk too.
That’s why, unless you have worked upon your trading strategy, it’s not a good idea to start with crypto margin trading.
Now over to technical and other details of Margin trading on cryptocurrency exchanges –
What are the charges for margin trading in cryptocurrency?
Now, this extra funding that is provided in crypto margin trading, is provided by the cryptocurrency exchange.
Thus, as with any loan, there are charges related to margin trading too. The charges are quite low, but still knowing them is important so that you can decide about the final cost of the trade.
Right now, the only exchange with fully functional (not beta) margin trading facility is Binance.
Here is how Binance charges margin interest fee:
Binance’s margin account interest rate is calculated on an hourly basis.
NOTE: If funds are borrowed for less than 1 hour, the interest rate will still be calculated as for assets borrowed for 1 hour.
If the daily interest rate is 0.02%, the hourly interest rate is calculated as 0.02%/24.
The calculation formula: I (interest) = P (borrowed money) * R (daily interest 0.02%/24) * T (in hours)
If user A borrows 1000 USDT at 13:20 PM, and repays at 14:15 PM, the interest rate is calculated as 1000 *（0.02%/24）* 2 = 0.01666667 USDT.
Margin account interest rates may be adjusted from time to time. Please refer to the following link for the latest interest rates, borrowing limits and other details regarding Margin trading:Binance/Margin-fee
Crypto Exchanges providing Margin Trading Option
Crypto Exchanges with margin trading facility are reviewed in detail in this post. Here is the quick list:
How to enable margin trading facility?
You can easily enable margin trading facility from your exchange dashboard.
Here in the example below, I am using the screenshots from Binance exchange. The process is similar in other exchanges too.
Head over to trade section:
Click on margin and it will take you to margin trading dashboard. You will see following agreement before proceeding further:
You will now see the option to enable margin wallet in your account. You need to accept this agreement for enabling this option.
(Margin trading is one form of leverage trading, thus it requires additional agreements for financial and legal safety of exchange)
Pros & Cons of Margin Trading in Cryptocurrencies
Benefit of Margin trading
Only benefit of margin trading is that you can take bigger positions on your trading capital, thus increasing your profit potential.
Thus, is especially preferred by experienced traders who are new to cryptocurrency trading and want to use their existing knowledge & experience to take maximum benefit of big price moves.
Risk of Margin trading
The ability to take bigger positions with small capital also increase the chances of bigger losses in margin trading.
Though this risk is only when you take each trade on big margins. Which is not necessary. You can take margin as per your trading strategy and stop loss. Thus, keeping the risk factor always in your control.
Crypto margin trading for beginners – Final thoughts
Once you have developed your way of trading in cryptocurrencies, then margin trading provides a leverage to earn higher profit with limited funds of your own.
This is escpecially true if you are a scalp trader, who holds the position from few hours or a swing trade who trade for few days only.
If you are more of buy when cheap and then hold till market is overheated, then margin trading is not suitable for you. You never know when the high is going to come and you will be paying interest on daily basis. Not an ideal situation.
Is there an additional fee for margin trading in crypto exchanges?
Except for interest fee, there is no additional fee charged by the crypto trading exchanges for allowing you to trade using margin trading facility.
Moreover, if you are using margin facility regularly, that means you traded volume gets bigger faster and it makes you eligible for higher trader tiers and thus lower trading fee.
Can you buy Bitcoin on margin?
Yes, on select exchanges which allow margin trading in cryptocurrencies, you can buy Bitcoin upto 5x-10x margin.
All you need to buy Bitcoin on margin is margin trading enabled account on the crypto exchanges where margin trading is available, like Binance, Bybit.
What does ‘x’ stands for in margin trading account?
In margin trading, x refers to the multiple to your original funds that you took as additional leverage.
Thus, if you have $ 500 of your own funds and you took a position in margin account of $ 1000, that means you took leverage of 2 times of your original funds.
In this case, the leverage is 2x (where x is your original fund).
What is liquidation price in margin trade?
Liquidation price is forced risk management system by crypto trading exchanges that allow margin trading.
You see, funds you get are from the exchange or other lending coin holders in the exchange. Now, when you take a bigger position, you expose yourself to bigger risk too. In case you are wrong, then your losses can wipe out your capital.
Your capital is your responsibility, whereas the exchange focus on protecting the funds lent to you.
The liquidation price is the price at which, the exchange will exit from your position to protect your account from going into negative.