Trading crypto on margin, for many, is where it all goes wrong. I personally think you’re an idiot if you are margin trading crypto. Especially if you don’t know the first thing about trading!
Not what you wanted to hear?
Well… for some it goes incredibly well. It can, has, and frequently does net people huge profits.
What is margin trading?
Trading on margin, or "margin trading", is a form of leveraged trading. A broker or exchange lends you money. To get the loan, you put up collateral–money, or a liquid asset of some sort.
Now: Margin trading crypto, is just as simple.
It’s margin trading, but with crypto.
- You think the price of Bitcoin will go up.
- You only have 1 Bitcoin, but you want more exposure.
- You put up 1 Bitcoin as collateral.
- The broker gives you 5X leverage to play with.
- You buy 5 Bitcoin.
- Bitcoin doubles in price.
- You walk away with 10X your initial investment.
Is margin trading dangerous?
Yes. It is very dangerous. Take it slowly if you’re new. Extremely slowly.
You’ll notice the previous numbered list example was pretty positive. You walked away with 10X your earnings. Good for you! But … You could have been wrong.
Well, if you were wrong, your BTC would have been wiped out. Before it even halved. See: At 5X leverage, a 20% price move against you will completely wipe out your collateral. Simple maths.
Worse: you could be indebted to the broker. Especially if the price moves too fast.
Why is margin trading crypto dangerous
Crypto is volatile. The price moves up and down violently. Volatile assets are great for making money. They can also lead to huge losses. Remember, every time someone profits, someone loses out.
The difference between margin trading and futures trading
Margin trading and futures trading are quite similar. Both involve leverage. A loan from the broker or exchange.
The key differences between the two:
- Margin trading uses spot markets.
- Futures trading uses futures; financial derivatives.
Spot crypto markets involve actual assets; "cold hard crypto" in this case, levered up with margin. Futures markets don’t directly involve crypto.
Margin trading requires crypto collateral. Whereas futures trading does not.
Margin trading fees
Most brokers will charge fees on margin. The same way that you incur interest on a loan. Margin fees are incurred on borrowed leverage.
Margin trading fees in crypto aren’t bad. And in recent years have fallen as competition has grown.