Crypto Traders Short Guide To Bitcoin Margin Trading And Betting ‘Against’ Crypto
A Short Guide to Margin Trading for Bitcoin
For many new crypto traders and investors, their idea of making money trading bitcoin is to buy low sell high. While that does work, there are other strategies like shorting or margin trading.
If you’re not familiar with what shorting is, it’s simply the process of borrowing some bitcoin from established exchanges, with the intention of trading with it and returning the bitcoins you borrowed later plus interest. Quite a few exchanges offer this service, including Poloniex, Bitfinex and Bitmex.
The amount you can borrow from these exchanges for the purpose of shorting often depends on your trading history, your balance in the account on the exchange and the leverage size. When this happens on exchanges, it’s officially called margin trading.
Definition Of Margin Trading?
This is known as the process of borrowing some cryptocurrencies from an exchange in the form of a loan with the intention of trading more volume than you can afford at the time. This helps increase your trading volume, while allowing you the opportunity to make a lot more profits than you would with your current balance.
For instance, if I have just 3 BTC at $6,000 each and want to get in on a trade that I think will be profitable, I can approach the exchange and ask that they lend me an extra 27 BTC making a total of $180k trading capital. Once the trade matures and bitcoin jumps to $8,000 each, I’ll keep the profits of $54k, minus the 15 percent interest fees and return the 27 BTC at the price I borrowed it -$6k.
Before you go all in and apply for margin trading on your account, you should know that while it can make you money, it can also result in significant losses. There are two ways to use margin trading:
- Short –in this instance, you hope bitcoin’s price will drop. So, you borrow from the exchange, sell, wait for the price to fall, and then buy back the quantity you sold. For instance, assuming you borrowed 5 BTC at $7000, sold it at the same price, waited for the price to drop to $5000, then repurchased the same 5 BTC at 5k each and gave it back, your profits would be $10,000 minus the 15 percent, making it $8,500.
- Long –in this instance, you some money to buy bitcoin at a certain price, then wait until the price appreciates so you can sell. Once sold, you’ll then go ahead to return the money you borrowed plus 15 percent interest. So, assuming you borrowed $13,000 to buy 2 BTC, and waited until the price jumped to $8,000 each. You can sell the 2 BTC at $16,000, take a profit of $3,000 minus 15 percent.
There’s even an extra strategy that you can use to make even more profits on your trades. Although this also increases your risk of losses. This is through the use of leverages which is essentially a multiple of your funds in the form of trading credit.
So, if you already borrowed 1 BTC, a 5X leverage means you can make five times that from your trades. But, if you do lose, you’ll be in debt to the tune of 5 BTC. This can either do wonders for your profits when used correctly or put you in serious debt if you lose.
Things To Consider Before Dabbling Into Margin Trading
As great as it is, margin trading is often high risk in the sense that you’ll be borrowing someone else’s money to execute your trades. This means you have to pay back the person regardless of whether you made any profits or not.
This can either blow up your profits or risk. The choice is yours. This is why margin trading is often best for traders with lots of professional trading experience. It can also create something called a margin call. A margin call happens when your capital or collateral’s value drops below a minimum required value.
For instance, if you have just 1 BTC and opted for the 10X leverage, that means you can trade 10 BTC. But if the price of bitcoin drops by 10 percent, you’ll get the margin call and forfeit your 1 BTC in the process.
As you can see, the risk is very high. This is why you must be careful about getting into margin trading. Only do this if you have sufficient experience, have done your research properly and know there’s little to no chance of you failing.
Some Vital Margin Trading Terms You Should Know About
As with all industries and disciplines, this one also has its own jargons. You should know these terminologies so you don’t get confused while signing up with the exchanges or mistake one term for another. While you can carry out your margin trading activities on quite a few crypto exchanges, the best one for now is called Bitmex. That said, let’s explore these:
- Funding Rate –this is the interest rate you have to pay when you’re doing margin trading. On Bitmex, this is paid every 8 hours.
- Funding Book – available on Bitfinex, this is the market where you can led other traders that participating in a margin call your coins. In exchange, you’ll get your coins back plus interest when the time is up. Lenders can determine how much they want to get paid as interest while putting up their coins for loan.
- Liquidation Price –this is the price at which the position you took courtesy of the leverage you used expires.
- Limit Order- traders who post limit orders are considered market makers who provide liquidity on the orderbook. Some platforms like Bitmex typically reward market makers because they’re a providing a sorely needed service –liquidity.
- Market Order–traders who post market orders are the opposite of those who post limit orders as they’re “takers”. Taking market orders may involve paying some fees to get the best rates offered in the orderbook.
- Mark Price –this is the price at which currencies are being traded on the exchange.
- Post-Only –limit orders are often executed almost instantly. Post-only are those that aren’t accepted instantly. This is commonly used by high volume traders who never want to be takers.