This type of trading has been specially designed for those people who have a limited amount of resources (Bitcoin and Altcoins). They usually start dealing with margin trading in order to add leverage to the investment. This means that you can increase your investment without necessarily having to actually hold the assets. Here, we should mention this type of trading may seem tempting and easy, however, it is not. In fact, margin trading is definitely not recommended for everyone due to its high-risk level which is significant.
If you are interested to learn more about this type of cryptocurrency trading, we advise you to read the following article. We have gathered the basics you need to understand what margin trading means.
Short Description of Margin Trading?
As we have already mentioned, this type of trading allows you to open a position with leverage. Margin trading is possible thanks to the lending market. The main function of lenders is to offer loans to investors. This will help traders be able to make bigger investments. Lenders themselves benefit from interest on the loans. In some particular exchange services’ providers traders can offer the loans for the margin markets. In others, the platform itself ensures them. The main disadvantage in the second option is the fact that the coins should be hold in the exchange’s wallet. And this is less safe than when holding them in a cold wallet.
Which Are The main Risks When Dealing With Margin Trading?
The total cost of a margin position consists of several elements. Part of it includes the need of paying the interest for the borrowed coins. Also, it includes all the required fees for opening a position with the particular exchange. Of course the higher the chance of a win, the higher the chance of loss. The max you could lose is the entire invested amount in the given margin position. This level is called the liquidation value. In other words, this is the value which only includes your own invested funds but not the loaned money.
Useful Advice About Margin Crypto Trading
- Managing the Risk Levels. Users should keep in mind that there must be set a clear and transparent set of rules when engaging in margin trading. The most important things to keep account of are the monetary sum that one is willing to put at the stake. Know and make sure that you are willing to lose it.
Financial endeavors, especially those in the cryptocurrency exchange sphere, are highly volatile and always include a certain degree of speculation. Every user should establish his or her very own principles of when to close a position, turn on the stop loss feature, and withdraw the earnings.
- Keep Constant Track of the Coin Market Cap. Financial assets are prone to rapid price swings. The same is valid with an even greater force for the Altcoin market. Margin trading with crypto trading pairs can double and even triple the risk levels.
If the user is certain that he or she wishes to do it, then they should focus on short-term trading leverage positions in the beginning. Once they have gotten used to the way things work, they can begin to apply newly-acquired skills and strategies. The daily fees of margin position s often appear to be insignificant but they can increase swiftly with time, turning into a financial burden.
- Rapid Market Movements. Crypto trading operations are prone to extreme price fluctuations that occur in both directions. Most online investors remember the Cryptocalypse of early 2018 when even the Bitcoin value surged to unheard of levels. The main risk in such a scenario is that the deep will touchthe liquidation rate.
Another possible turn of events is when the leverage is comparatively high so the liquidation value is also relatively close to it. But users can turn the so-called deeps into a financially positive and favorable experience.
They should do their best to try and set closing target positions. The best outcome in such a case would be for the deep to run over them, leaving the crypto trader with solid and genuine investment results, after which it should go back to the previous price.
Cryptocurrency trading has become increasingly popular due to the immense boost in the Bitcoin’s value. It is currently very high which allowed the smaller and less popular digital currencies to become more success, too. This is why many people start to deal with this type of online business in order to generate satisfying and consistent results. It is important to remember, however, that it is not as easy as it may seem, therefore, you should carefully select the most suitable way for you to start trading with cryptocurrencies.