Sharp-eyed observers noticed a small change in Binance's API documentation about three weeks ago. The change indicated code that would allow for margin trading cryptocurrency on their platform. News of the change spread like wildfire around crypto trading communities that started speculating on new strategies and the hopes of gainfully increasing profit.
The question many should be asking themselves is not about new strategies or potential profits. It is simply whether bringing margin trading to cryptocurrency is a good thing at all. Many in the trading community have been caught up in the hype of the news. This hype has blinded them to the value, or lack thereof, of margin trading in cryptocurrency.
Margin Trading, Forex, And CFDs
Margin trading is not new to cryptocurrencies. It has been used before, only not in its native form. Traditional financial market traders have been making margin trades based on cryptocurrency using CFDs. The CFDs would be based on cryptocurrency, so it is not a native solution.
Seeing as Binance is allowing many to leave out the middle man, could they pose a real risk to brokerages offering CFDs? This is unclear, as we only know that Binance will be offering margin trading. Margin trading in and of itself is not what entices traders. It is the leverage offered. The spread. These are what draw a particular traders interest to a particular platform. Should Binance find the correct balance, they could gain a significant share of the market. The question then remains – would the other traders stay?
Volatility, Margins, And Hodling
The problem is that margin trading is quite limited. Traders are able to make much higher profits from using leverage, its true. The problem is in the name – the narrow “margin” traders have when executing trades. This is the reason why the optimal market for margin trading is forex. The low volatility helps margin traders control both their profits and losses. This isn't possible with cryptocurrency which is notorious for being extremely volatile.
Seeing an asset on the forex market increase 15%-50% is a shock. Seeing the same thing in the cryptocurrency markets is a Tuesday. This is what traders are focusing on when they look at how much leverage will increase their profits. When the assets go the same amount in the other way, traditional crypto traders can simply wait it out. Hodl and wait out the losses. If you're a margin trader, then you're out of luck. You would be guaranteed to have your trade closed if an asset drops by 20-30% in a day. You have to take the losses, no matter what.
Few Advantages, Leverage Is Nice Though
So the only real advantage that you have is the leverage offered. Many traders see this as an acceptable trade-off for giving up the right to hodl. The key here is the charges paid for holding open a trade. A normal trader can let the crypto sit in his or her wallet and wait for the right time to strike. A margin trader, on the other hand, has been paying fees to keep the trade open while waiting for the price to rise according to their specifications.
This is only really useful for traders who fully day traders, people who do not hold onto an asset for longer than 24 – 48 hours at the most. Using leverage in this scenario is not only realistic; it is also the only type of trader who will benefit from using margin trading.
How Does This Change The Crypto Market
The influence of margin trading has been small on the crypto market. While CFDs have allowed traditional traders to make gains, it never touched the native market. Smaller exchanges with low liquidity and number have tried to implement margin trading but it was hopeful at best. There was no impact.
Binance, on the other hand, is a large company. They have been making waves in the market and now they are going further by offering margin trading. In case margin trading does take off on Binance's platform, we could be seeing a new crypto boom like the one in late 2017. Only this time, because the profits from using leverage will be reinvested, it might be longer lasting.
We could be seeing a major shift in the perceptions of the market with regards to cryptocurrency or we could be staring down the edge of oblivion. The result will be interesting whatever happens.