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Margin Trading: A Guide for the novice Crypto Investor

Margin Trading: A Guide for the novice Crypto Investor

Margin trading allows a trader to open positions using borrowed funds. For example, you can buy crypto currency with a double shoulder. Then, when it goes up by 10%, the trader’s profit will be 20%. Without financial leverage, the trader’s profit would be 10% Margin trading is possible due to the existence of a vast lending market. Many of its members are willing to provide loans to traders. In turn, lenders will receive a percentage for the use of borrowed funds. On some crypto currency exchanges, users have the opportunity to independently credit other players, receiving additional income from savings. They can also lend their Bitcoin, but in this case, the crypto currency will have to be stored in the wallet of the exchange, which is less secure than a hardware / cold wallet. For more information kindly visit this link, https://www.algolead.com/brands.php.

What is crypto currency lending?

Crypto currency lending allows you to earn on their crypto active assets. It is inextricably linked with the concept of short trade. With this type of lending, investors lend assets to traders for sale. The main advantage is the lack of concern about whether there is enough money from the trader to buy them back and return them to the rightful owner. The fact is that the crypto exchange itself monitors everything. It will not allow the trader to withdraw money from the account until he settles the debt. As with the trade itself, there are various bots that automate the lending process.

Costs and risks

As noted above, margin trading is associated with the payment of interest on borrowed coins, regardless of whether the exchange acts as a counterparty or individual users. In addition, the trader pays a commission for opening a position. Remember that risk increases as potential rewards increase. The exchange controls the so-called liquidation value (LS) and ensures that the trader does not lose more than is available on his account.

Maintain a minimum balance

The trading platform requires traders to maintain a minimum balance in the account. Usually this level is set at 30%. If it falls below this mark, the exchange will require to place additional collateral. If the trader is unable / unwilling to replenish the balance, some or all of his positions will be forcibly closed.

Interest may exceed profits

Margin trading can be profitable, especially in the short term. However, in the event that the expected price jump / fall was not followed. However, it is better to close the position and save on interest. If it is left open for a long time, interest payments can eat a significant share of the profits. Lending is usually carried out at high interest rates, and in some cases the profit may not be sufficient to cover them.

Watch the market closely

Crypto currencies are known for their volatility; therefore, trading with the use of borrowed funds involves a double risk. It is recommended to open only short-term marginal positions. Although at first glance the daily costs associated with them seem insignificant, over time they can grow into a significant amount.

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