Margin Trading in Cryptocurrency for Beginners: Learn How to Get Started

Margin trading has long been a part of the investment lexicon. The idea here is that you buy more than you can actually afford to on a margin. It’s a quick way to turn over investments for a few dollars. The broker lends you money to buy the shares, then keeps them as collateral. When you sell the stock, you repay the broker and keep the profits. While margin trading is typically talked about in terms of stocks and other securities, it works with cryptocurrency markets as well, and understanding exactly how it works is the key to making a solid investment.

How Does Margin Trading Work? The Basics

Margin trading in cryptocurrency works a lot like it does in stocks. Using a margin trading facility, you can buy the cryptocurrency of your choice on a margin. What is margin trading facility? It’s the space your broker creates for you to be able to trade in this manner. The answer to the question how does margin trading work, begins here: you make a small investment to open a position with your broker or trading platform. Most people consider this to be the initial margin of the trade. To keep that initial position, you have to have a certain amount of money in your account. The margin trading facility decides how much you can use for margin trading, and that may vary based on exactly which platform you’re using as well as how much you put in at the outset. From there, you decide what to purchase.

Still a little confused? Think of it like this. When you purchase a home with a mortgage, it’s a lot like buying cryptocurrency on a margin. You made a down payment on the home to a lender. They provided the rest of the funds. You make monthly payments to the lender to repay that loan. If the value of your property increases, you could sell it and actually make a profit from your original investment because you’ve only actually put the down payment into it. If there’s a recession, though, the remaining debt on your home may be bigger than the value of your home at the moment, so you owe more than you own.

Cryptocurrency trading on the margin works the same way. You may a down payment, you invest it in some cryptocurrency, and you either make a profit because the market goes your way or you incur a loss because the market didn’t go your way.

Obviously, margin trading is a bit more complicated. In any kind of margin trading, cryptocurrency included, there are both long and short positions involved. If you choose the long position, you’re trying to guess how much a certain cryptocurrency might increase. If you choose the short position, on the other hand, you think the price of a cryptocurrency might decrease. Either way, your deposit is collateral, and your MTF releases that and your profits if you manage to do it well. If you don’t, you lose your initial deposit, and you may actually owe more than that in the long run, which exposes the real pros and cons of this situation.

Investing on Margin – Pros and Cons

Margin trading in cryptocurrency can be just as dangerous as margin trading any other investment. The only time you want to do this is when it’s absolutely necessary, and should you choose to do it, don’t use more than 10% of your current assets’ value. Any discussion of investing on margin pros and cons must be annotated with the fact that the risks of margin trading in cryptocurrency are special, though. The market for cryptocurrency is incredibly volatile, which means that every margin trade you make comes with a much higher risk level. In fact, one of the biggest risks of margin trading here is that you could even have losses that go far past your initial investment. After all, in the world of cryptocurrency, even a tiny drop in the market price can create some serious loss.

How Much It Takes to Trade on the Margin

Typically you’re going to be required to deposit at least $2000 to open a margin account, but there are spaces where much more will be required. Once you’ve opened your account, you can usually borrow half of the funds needed to make your trade, but you don’t have to borrow quite that much. You can borrow less and create a much smaller risk. There are usually fees and interest associated with this kind of trading too. You will typically have to pay margin interest just for the right to borrow the money involved. You may also have to pay other fees to the platform on which you trade, and those can vary by how much you’re trading and how much your initial deposit was.

A Few Things To Know About Cryptocurrency Margin Trading

Wondering about the answer to “should you trade on a margin?” There are lots of things you likely need to know before you get started. One of the most important is the margin call. This is usually a warning that the balance in your account has fallen below the required minimums. For most MTFs, that means you’re not keeping up your end of the bargain, and you must immediately add funds to that account. You can usually do that by just making a deposit, but if you’re stretched to thin, that may be an issue. If you don’t make that deposit, your account becomes a risky proposition, and typically you’ll have to pay everything back. The only way to stop this problem is to be sure there’s plenty of money in the account. Some platforms give you the option of setting some limits that help you to remember when to sell and ensure you have fairly limited risk. Once a margin call is triggered, you usually get between two and five days to meet it, so if you decide to start cryptocurrency margin trading, be aware that you’ll want to have some funds in reserve to deal with any margin calls that are triggered.

Understanding Margin Trading Regulations for Cryptocurrency

If you’re still left wondering should you trade on a margin, regulations are another thing to consider. Cryptocurrency is new enough for most governments that margin trading may or may not be regulated depending on where you are. In India, for example, the SEBI created new rules that took effect in late 2020 and actually create margin trading regulations for cryptocurrency. In the United States, there’s a battle that may result in not just cryptocurrency margin trading regulations, but a ban on cryptocurrency margin trading. If you’re concerned about legal regulations where you live and trade regularly, make certain you connect with a financial professional before you begin trading.

If you think cryptocurrency margin trading might be right for you, make sure you have a solid grasp on it before you get started. You need to know the answer to the question – how does margin trading work – but also the idea that there are plenty of rewards that come with lots of risks. Understand how it works and the potential dangers before you get started.