With the sudden rise in the popularity of cryptocurrency, almost everyone is new to the world of digital currency trading. While newcomers try to understand how they should trade in cryptocurrency, terms like “shorting” cryptocurrency, margin trading, or leverage trading can be quite confusing. Many are still trying to understand what cryptocurrencies are all about. If you are one of these people, you need a simplified guide to understand how you should trade using cryptocurrencies.
Crypto margin trading exchanges might seem tricky at the moment. However, with a little more understanding of what margin trading is and how it works in the context of cryptocurrency, you will understand an exchange service for trading in no time!
Margin Trading in Cryptocurrency
Margin trading is risky; however, it is popular because you stand to gain a lot in profits if you play your cards right. In margin trading, one borrows some amount from a broker and adds them to their existing funds to start trading in cryptocurrency. That is, you borrow funds from a lender, or a broker, in this case, to increase your final returns.
You may use these funds to either bet on the price of an asset going up or down. Given the volatile nature of the cryptocurrency market, this is, of course, a risky trading move.
Why Do Traders Use Borrowed Funds?
The cryptocurrency market is quite volatile; hence, traders often do not want to pool all their funds in cryptocurrency trading. Additionally, many traders may not have as many funds to trade in cryptocurrency. Hence, cryptocurrency margin trading exchanges are the perfect solution for such situations.
With margin trading, traders can gain more experience in cryptocurrency trading using additional funds. They can quickly multiply the funds they would typically be able to use in trading.
Hence, in cryptocurrency trading, marginal trading works as additional capital, which traders can use as leverage (therefore, it is also referred to as leverage trading). That is, traders use their finds in addition to borrowed funds to help increase their profits. In this case, the lender may be an individual, an organization, or cryptocurrency exchange services.
Using Margin Trading In Cryptocurrency
When considering margin trading, you need to consider the cost involved. When borrowing money, lenders need to pay interest on the amount they borrow, and there may be additional charges involved in trading using exchange services. Other “liquidation values” are added to the trading costs, and hence, the final cost will depend on several factors.
Should You Go “Short” or Go “Long”?
When trading in cryptocurrency, traders can opt for long-term trading. They can purchase bitcoin or any other cryptocurrency and keep it until they can sell it at a higher price later on. This refers to going long; traders will need to hold on to their token until they think that they will be able to sell their token for an increased value.
Alternatively, a trader can buy a cryptocurrency which they sell at a higher price and wait until they can buy it back again at a lower price. This refers to going short because the traders sell their token immediately and only buy it back when they see that the token value has fallen. This method is also referred to as “shorting” the value of the token. Usually, traders who open a short position want to benefit from the fall in a token’s prices.
Hence, traders will either need to wait until there is an incredible increase in the price of the cryptocurrency so that they can sell it at an increased price, or they have to wait for a drop in the price so that they can improve their profit.
What Losses Do You Incur?
Ultimately, the loss that you will need to bear will amount to the cost of opening a position, whether you decide to keep the token or sell it right away. When you open a position using an exchange service, the liquidation value is the value at which crypto margin trading exchanges will automatically close a position. Hence, the trader will only lose out on their funds, rather than losing out on the value they borrow and the interest which they will pay.
Hence, margin trading is a valuable tool when trying to understand the cryptocurrency market. Traders do not have to worry about losing more than they can invest and increase their potential revenue by borrowing funds to add to their investment capital. Thus, margin trading helps you access a profitable investment field, and exchanges ensure that you do not have to bear great losses, and the loss only amounts to the funds required when opening a position.
Interesting related article: “What is Blockchain.”