Margin trading is a strategy that allows investors to buy other assets without using their own funds and without borrowing funds from a broker.

Margin trading in cryptocurrency markets is no different from traditional margin trading. Margin funding is considered a loan to trade a digital asset, where the margin is the money borrowed from a broker and is the difference between the total value of the investment and the loan amount.

The assets that make up the balance of the margin trading account are used as collateral for the loan to cover the credit risk and potential losses of the loan, especially when trading on leverage. A brokerage firm or a crypto exchange may liquidate a trader’s assets if the value of the investment falls significantly.

To trade crypto with margin, an investor needs to be authorized by the service provider to open a margin account where crypto, cash, or securities are deposited as collateral for the loan. In margin trading cryptocurrencies, leverage will increase both gains and losses, and a margin call can be accompanied by heavy losses, such as a decrease in the equity value of securities.

A margin call allows an exchange or broker to liquidate an investor’s collateral without consent or request more funds in their margin account to avoid forced liquidation to satisfy the broker.

How does margin trading work?
Margin trading aims to maximize profits and allows experienced investors to potentially achieve them quickly. They can also bring dramatic losses, if the trader does not know how they work.

When trading on margin, crypto investors borrow money from a brokerage firm to trade. They first deposit cash into a margin account that will be used as collateral for the loan, a type of security deposit.

They then start paying interest on the borrowed money, which can be repaid at the end of the loan or with monthly or weekly installments, depending on current market conditions. When the property is sold, the proceeds are used to pay off the first margin loan.

Debt is necessary to increase the purchasing power of investors and buy large amounts of crypto assets, and the purchased assets automatically become collateral for margin lending.

The amount an investor is allowed to borrow depends on the price of the property purchased and the value of the property. However, typically a broker will offer an investor to borrow up to 50% of the purchase price of a cryptocurrency against the amount of collateral in the account.

So, for example, if an investor wants to buy $1,000 worth of cryptocurrency and keep half of it on margin, they will need at least $500 worth of collateral to pay off the initial loan.

Margin trading leverage
A margin account is commonly used for leveraged trading, representing the margin ratio of borrowed funds with leverage. A margin trade example might be opening a $10,000 trade at a leverage of 10:1. In that case, a trader must commit $1,000 of his capital to execute the trade.

This leverage ratio depends on the trading platform and the market traded. The stock market, for example, has a typical ratio of 2:1. In contrast, with futures contracts, the ratio increases to 15:1. In crypto margin trading, where the rules are not always as established as in traditional markets, the leverage ratio can vary from 2:1 to 125:1. The crypto community usually simplifies by citing ratios of 2x, 5x, 125x, and so on, which represent the amount multiplied to collect their investment.

Margin trading includes terms such as going long or short on trades made by investors. When people go long, they are referring to an extended position they have taken, predicting that the price will rise in value. A short position is based on the assumption that the opposite will happen, and investors have a negative position on the crypto, believing it will decline in price. In that case, the investor will benefit if the asset depreciates.

The benefit of margin trading is to maximize profits, but investors can also lose money. The trader’s assets are collateral for the loan, and if their value falls below a certain threshold, the broker reserves the right to force a sale as long as the investor meets the minimum requirements for margin trading as collateral. Does not inject more funds.

What is futures trading?
Futures are a type of derivative contract that connects a buyer and seller of a cryptocurrency to execute a deal at a price established on a specific date in the future.

Some crypto enthusiasts prefer to invest through futures trading instead of dealing with the actual buying or selling of private keys, passwords and generally avoid going through the hassle that most platforms require to trade crypto. Along with this, they have gained exposure to property.

The terms of crypto futures trading are specified in a futures contract, which allows a buyer to acquire a crypto asset at its expected price on a specific date and a seller to sell that asset on that date.

Source: CoinTelegraph