Traders decide to trade on the margin because this is the way to operate big budgets without the necessity to deposit a lot. Many beginning crypto enthusiasts lack knowledge about trading crypto on margin. If you are a trader from such a category, this guide will be useful for your future performance.
When you trade on margin, you work with leverage. In simple words, margin trading is about using borrowed money to speculate on the chosen financial product. You can choose cryptocurrency to trade with as well. However, the conditions of margin trading depend on the leverage ratio enabled by your broker.
The biggest crypto exchanges, including Binance and Coinbase, enable margin trading on cryptocurrency. They have special margin trading accounts, on which you will transfer borrowed funds. You then need to repay the amount, although there are no scheduled deadlines within a repayment must be confirmed.
Why do crypto traders trade on margin?
Leverage trading is popular not only with crypto enthusiasts – forex traders use this style quite often as well. However, in the case of crypto traders, they aim to benefit from the extreme market volatility. How do they achieve this and why do they ever need margin trading for this?
- Trading cryptocurrencies on margin increases the probability of boosting your earnings. This approach provides you with the possibility to operate large funds even though you don’t actually own them. Thus, you can increase the potential revenue even if price movements aren’t significant. In the case of the crypto market, value fluctuations might be very big, which multiplies your chances to benefit.
- It’s possible to control the losses caused by margin trading if you are aware of efficient risk management practices. When operating bigger funds, you also detect more pitfalls and learn how to avoid them.
The advantages of trading cryptocurrencies on margin
- Increase the budget you can operate. With the help of a high leverage ratio, you significantly increase your buying power. The higher the leverage is, the more buying power you can have. For instance, if a broker offers a leverage ratio of 5:1, your buying power is 5 times higher than your account. It’s suggested that beginning crypto traders should fall for impressive buying power if they don’t have enough experience in dealing with trades. The best option for you is to start trading on a leverage ratio of 1:1. But if you want to try trading on margin, don’t go higher than 10:1.
- You can benefit from falling prices. This advantage works if you can trade crypto with CFDs. Thanks to this, you have the chance to profit from both bullish and bearish tendencies in the crypto market.
- Margin trading can be an additional instrument that diversifies your trading portfolio. Thanks to a higher buying power, you can add more assets to your portfolio and benefit from their price fluctuations. The more financial products you add, the less significant the impact of each one will be.
The disadvantages of trading cryptocurrencies on margin
The statement that trading crypto on margin can be very profitable is true. However, in the world of trading, everything has its pitfalls. Here are the ones you can face when trading with a high leverage ratio:
- You leverage not only your earning potential but the amount of money you can lose as well. That’s why you should be very attentive when working with a high leverage ratio – this coin has two sides.
- You will owe interest if you decide to trade cryptocurrencies on margin. Leverage trading is based on borrowed money that should be repaid in the future. Thus, you will owe interest on the loan when holding positions overnight. They aren’t very high but this adds additional matter you must always keep in mind.
Basic recommendations for beginning margin crypto traders
It’s very important to realize that theoretical knowledge about crypto trading on margin is not enough for you to benefit. You have to try everything on your own. Here we have some valuable tips on how not to fail:
To overtrade is to open the number of crypto positions you cannon manage. This is a very simple and frequent mistake because traders are attracted to the possibility to boost their earnings thanks to a high leverage ratio. But we suggest that you should be in a hurry. Be reasonable and take your margin profits step by step.
Don’t be too tolerant of risks
The basic trading risk management rule says that you shouldn’t allocate more than 2% of your capital to a single trade. Unfortunately, many traders break this rule because the reward seems more lucrative than a potential loss. If you want to avoid serious crypto losses, don’t act like this – don’t ignore risk management recommendations.
Consider market fundamentals
When trading cryptocurrencies, we all rely on technical analysis. Nevertheless, digital coins are assets that are often priced in accordance with market fundamentals. That’s why you should always track them, especially, when trading on margin, when risks of potential losses are higher than ever.
Also Read: How Can Blockchain End Monetary Corruption?
The final thought
To sum it up, crypto trading with a high leverage ratio is a venture you should try. Although potential losses, this is a good way to earn and fully realize all the risks you can face when trading in the crypto market. Follow our recommendations and you will have more chances to make everything in accordance with your initial plans.