Having heard stories of people’s making fortunes by investing early in equities is keeping people interested in crypto trading. And it’s not just the interest, trading of cryptocurrency is slowly and steadily gaining prominence as investors and traders now have a belief that these small pieces of innovation are something that is here to stay.
This is even compelling the institutions to enter the race who now are demanding crypto exchanges sophisticated features and services which are pretty common in equities and other financial markets. Hence a lot of crypto exchanges are evolving themselves to accommodate products and services that are pretty commonly available for equities and other financial products. One such prominent service happens to be margin or leverage trading which is slowly picking up among crypto traders.
Overview of Margin Trading
Margin trading or leverage trading is a perilous game that has been played in financial markets by mature traders for quite some time now. It is a strategy where the trader uses borrowed funds from his broker to trade assets which eventually becomes the collateral for borrowed fund the broker.
As this trading strategy is highly risky, it is conducted only through a specialized account known as the margin trading account which is different from the normal trading account used by all the investors. This separate account also allows investors to use additional strategies such as short selling the asset, while buying can happen the same way either in cash or margin account.
Margin trading is only possible as there are lenders available to earn interest, provide leverage to traders so that they can invest or trade in larger amounts compared to what they have in hand.
To explain margin trading better let’s look at an example, if a trader opens a margin position with 10X leverage and his base assets have increased by 10% in value then his position would have yielded 100% because of the 10X leverage. This would happen when standard trades are traded with a leverage of 1:1.
Margin Trading Comes to Cryptocurrencies
As mentioned earlier, a lot of crypto exchanges are now exploring margin trading for cryptocurrencies so that the trader can take wider exposure to coins and tokens. But as the asset under consideration here is a little different, the rules of the margin trading also differ a bit when it comes to cryptos. Following are the points that make crypto margin trading different from that in equities and other financial markets.
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Peer to Peer lending for margin trading: In equities, the lenders that provide leverage for margin are brokers. But in cryptocurrencies, this leverage is provided by the exchange and in some cases like Poloniex, it provides other users too to provide loans to traders for margin trading.
Close watch and effective risk management: Since crypto coins are fairly volatile, margin traders need to keep a close watch and have an effective risk management mechanism to avoid huge losses. As crypto markets change their trend within minutes and have extreme fluctuations, a slight shift of focus could lead to huge losses for the trader. Since this loss is over-borrowed money there are chances that the trader may lose his margin money as well and end up paying huge interest on borrowed money. Hence most exchanges resort to effective risk management tools so they do not land up with a pool of incomplete transactions due to lack of security and capital.
The Option to Short Bitcoin & Cryptocurrencies
This peculiar strategy is limited to only margin trading for creating short positions. A short position basically means that the trader believes that there will be a drop in the price of any coin or token, and he may want to profit trading against the particular asset. Technically, short positions work by selling the asset first, and then later buying it. You don’t have to worry; the exchanges do this automatically for us.
The second role for shorting Bitcoin is the option to hedge your portfolio. For example, if a trader’s portfolio consists of 10 Bitcoin and he wants to hedge against the risk of Bitcoin’s decline, a 10X leveraged short position could be opened, and it would be equivalent to 40% of his Bitcoin portfolio. To open the position the amount required is only a tenth of it (10 times leverage). That means that the trader would need just to hold 1 Bitcoin. So, his Bitcoins are stored securely in cold wallets. However, one must not forget the risk of trading with leverage (especially the liquidation price of any position).
Margin Funding: Safer Bet than Margin Trading
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.
Popular Exchanges That Offer Margin Trading
While a lot of exchanges are trying to move towards the margin trading game, only a few of them have been able to popularly do it. Some of the leading names in this game are-
Bitmex is one of the most talked exchanges across the globe. One of the major reasons for this popularity is that Bitmex supports anonymous trading. This means that the website does not require KYC in order for a trade to experience the full potential of their services at the moment. This can change any time though. Another reason that makes Bitmex famous is that it has a variety of derivatives that suit each and every kind of trader. This includes Perpetual Contracts, Traditional Futures, Upside profit contracts, and Downside profit contracts. The website has been operating since 2014 and has its base operations set up in Hong Kong.
eToro has been amongst the leading online trading platforms since 2008. It’s branded as a social trading platform, and it aims to enable users to trade almost anything from commodities, currencies, stocks, and indexes to cryptocurrencies through one web-based and mobile platform. When it comes to margin trading eToro has had a very peculiar approach. On eToro, each instrument has its own minimum and maximum leverage, so make sure to choose a leverage level which is right for you. For some coins, the leverage ranges depending on the asset with a maximum of 30x. For example, for some assets, in order to open a $10,000 trade, the trader has to invest 1000$ with a leverage of 1:10.
Poloniex is undoubtedly one of the pioneer exchanges out there in the cryptosphere. Founded by Tristan D’Agosta, Poloniex is based out of the US and has been operational since 2014. It is currently owned by Circle, an internet financial limited. Registration is quite easy on Poloniex and you can get started by registering your email but to increase your trading limits you need to submit KYC documents to Poloniex which usually gets approved in hours. Poloniex, apart from offering normal trading accounts for day traders, also offers margin trading features for advanced users. On Poloniex one can leverage up to 2.5X in BTC and margin trade following 11 cryptocurrencies for BTC.
PrimeXBT is a relatively new cryptocurrency exchange which provides derivative trading options with leverage up to 100x in five different cryptos. This dynamic and innovative trading interface provides the traders all the necessary tools which would be needed for a successful trading day. Prime XBT is a Bitcoin-based platform, offering leveraged trading on five different cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Ripple. The company was founded in 2018 and started to grow exponentially. Currently, they serve clients in more than 150 different countries.
Based out of San Francisco, Kraken is one of the largest Bitcoin and altcoin exchanges in the USA. It is also the biggest exchange in terms of EUR volume where anyone can register using their email ID and get started after proper KYC verification. It typically takes up to 7 days to get the verification done from Kraken after which you can deal with fiat currencies like USD, EUR, GBP, CAD etc. One can also margin trade on Kraken and get the benefit of different leverage options that it provides for different pairs. It allows 6 cryptocurrencies to margin in 16 different pairs with the highest leverage of 5 times.
The Entry of Binance into Margin Trading
After months of deliberation and suspense, The world’s largest cryptocurrency exchange Binance has officially launched margin trading for “evolving cryptocurrency traders.” The service is being offered under the revamped platform “Binance 2.0,” claiming to allow users to move funds easily from the Margin Wallet to their primary Binance Wallet at zero transaction fees.
There are currently six supported cryptocurrencies – Bitcoin (BTC), ether (ETH), XRP, Binance coin (BNB), Tron (TRX), and Tether (USDT), with several pairs. Leverage available, however, is just 3x as compared to 20x expected before.
How to open a Margin Trading account on Binance
Opening a margin trading account is fairly easy at Binance:
Step 1: After logging in the user mouse to the top right corner to and hover over your profile icon.
Step 2: When the dropdown opens, one will have to click on their email to go to your account dashboard. The trader will able to see account balances from this page.
Step 3: Below “Balance Details” the trader will have to click on “Margin” to begin the process of opening your margin trading account on Binance.
Note: In order to open a margin account on Binance, the user will need to have completed identity verification (KYC) and make sure his country is not blacklisted.
Borrow Limits and Interest
The dashboard also gives the risk appetite of the borrowed assets. The chart gives the trader a risk level according to the borrowed funds (Total Debt) and to the funds held as collateral on the traders’ margin account (Account Equity).
The risk level changes according to the market movements, so if the prices move against the traders’ prediction, their assets can be liquidated. If the margin level drops to 1.3, the trader will receive a Margin Call, which is a reminder that he should increase his collateral (by depositing more funds) or reduce his loan (by repaying what he has borrowed). If the margin level drops to 1.1, the traders’ assets will be automatically liquidated, meaning that Binance will sell the funds at market price to repay the loan.
Margin Trading is definitely a great addition to cryptos. Although the risk is increased but it does give traders a chance to make huge money. If strategized cautiously every trader has an awesome chance to multiply his assets pretty quickly.
Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Follow him on Twitter at @KoinKing1 or connect with me on linkedin.