10x Your Crypto: A Guide to Crypto Margin Trading
With margin trading, you can supercharge your bets and ratchet up your profits (or losses, ouch!). Do you have the guts to tame the crypto market, where only the bold survive and the weak get liquidated? Let's find out!
As the adage goes, "fortune favors the bold but abandons the reckless." For cryptocurrency traders with an appetite for risk and rewards, margin trading promises amplified gains—and losses. So, how do you benefit without getting REKT?
Margin trading lets you borrow money from an exchange to supersize your trading position, giving you a chance to win big or lose hard. Say you want to buy $10,000 worth of bitcoin but only have $5,000 in your trading account. Not to worry, with 2x leverage, you can borrow the other $5,000 to go long. If bitcoin jumps 20%, your profit doubles to $2,000! Of course, if it drops, you risk losing all your money.
How's that for some mood setting?! Well, don’t worry, crypto margin trading is full of opportunities if you’re wise enough to learn the basics. Lucky for you, this article explores the ins and outs of margin trading digital assets, from the rewards to expect to the dangers to avoid.
What Is Cryptocurrency Margin Trading?
Margin trading, also known as "leveraged trading," allows you to open positions that are significantly larger than your invested capital by borrowing funds from a broker or an exchange.
The amount you need to deposit upfront for a leveraged position is called the margin. The ratio of borrowed funds to margin is expressed as a leverage ratio, such as 10:1 or 50:1.
👉 For example, with a 2:1 leverage ratio, you would deposit $5,000 as margin to open a $10,000 long or short position.
There are two types of margin trading positions:
- Long position: Go long, and you're betting prices will rise, allowing you to sell your coins for a profit later. You can open long positions any time you want, even without leverage, using only your own capital.
- Short position: Short the market, and you're gambling prices will drop so you can buy coins on discount to pay back what you borrowed. Short positions typically require margin trading since you are borrowing and selling an asset you do not actually own. However, if you own the asset, you can still short it manually or use automated trading bots such as Bitsgap’s to profit from a falling market.
Margin trading will amplify your profits if markets move in your favor. However, should it move against you, your meager collateral could get wiped out in a single unlucky hand.
So, if you’re willing to take on high risks while pursuing higher rewards, margin trading can be a useful tool. However, before getting started, you need to understand how margin trading actually works.
How Margin Trading Works
Margin trading lets you borrow money from an exchange to open bigger positions than you could with your own capital alone. The higher the leverage, the less actual money you need to ante up from your own stack — but the quicker it can disappear if your wager goes awry. To stay in the game, you've got to keep up your margin. And that’s fairly easy to do, as long as Lady Luck keeps smiling your way. But the moment the market turns against you and your equity (account balance + profit/loss) falls below the margin requirement, you’ll face a dreaded margin call. That means you’ll need to add more funds quickly or fold. And when you fold, the exchange is coming for everything left on the table.
👉 For example, with 100:1 leverage, you only need to contribute just 1% of the tally. The crypto exchange fronts the other 99% to help you make a bigger bet. If you win, you win, but if you lose, you’ll be left with nothing but a margin call notification as the exchange sells off your position to recover its funds.
Margin trading lets you super-size your trading account but beware: in volatile crypto markets, leverage cuts both ways.
Now, let’s get down to business — below are your crypto margin key concepts.
Crypto Margin Trading Main Concepts & Definitions
The key concepts to understand in margin trading crypto are leverage, margin, collateral, and liquidation.
Leverage Explained: What Is Crypto Leverage Trading?
Leverage refers to the use of borrowed funds to amplify buying power. For example, with 4x leverage, you can deposit $25 of your own crypto and borrow $75 from the exchange, giving you $100 total to trade. The exchange doesn't care what you buy as long as you pay it back—with interest.
Say you want to buy 5 ETH at $1,000 each, a $5,000 position. With 5x leverage, you only need to put up $1,000 of your own money. The exchange lends you the other $4,000 to purchase 5 ETH. Your equity in the trade is $1,000 (your deposit) plus any profit or loss. If ETH goes up 25% to $1,250, your 5 ETH are now worth $6,250. You've made a $1,250 profit, and your equity is now $2,250.
However, if ETH drops 20% to $800, your 5 ETH are now only worth $4,000. You have a $1,000 loss, reducing your equity to $0. This is where the margin call and liquidation come in. At first you’ll get a margin call, demanding you add money to meet the margin requirement (say $100 for 5x leverage). And if you fail to act, the exchange will liquidate your position by selling your ETH to pay back the loan.
Crypto Margin Definition
As we’ve explained earlier — whatever you deposit in a leveraged position is called a margin. As crypto prices change, so does the value of your equity in a margin position. If your equity drops too far below the minimum margin requirement set by the exchange, you'll face a margin call.
The margin call means your position has become too risky for the exchange to continue lending full support. They need you to add more of your own money to prop it back up or sell some of your holding to pay back part of the loan. Either way, you'll have to restore your equity to the required level to avoid liquidation.
Now, there are two types of margin:
- Cross margin shares your total collateral amount across all open positions. The benefit is that you reduce liquidation risk for individual positions by combining your margin. However, if one position is at risk of liquidation, the exchange may sell assets from your other positions, potentially wiping out multiple positions to save one.
- Isolated margin assigns separate collateral amounts to different trading pairs like BTC/USDT or ETH/USDC. The benefit is that you limit your risk to specific positions. The downside is lower margin levels for each pair and increased liquidation risk.
When you take a loan from your exchange, the funds in your account become collateral. If your equity level drops below the margin requirement due to losses, you'll get a margin call—add more money or sell assets to raise your equity back up, or the exchange will sell your collateral to pay off part of the loan.
Say you buy $1,000 of ETH with 5x leverage, putting up $200 of your own money and borrowing $800. If ETH drops 10% to $900, your holding is now worth $900, but you still owe $800. Your equity is $100 ($200 deposit minus $100 loss), below the 15% margin requirement of $150. So you get a margin call. To meet it, you must restore your equity to $150. You can add $50 of your own crypto or sell $50 of the ETH. If you don’t take action within a specified time frame, your exchange will sell $100 of your ETH to reduce your loan balance to $700. Your equity then becomes $0 — the remaining value of your crypto minus the $700 still owed. At this point, any further losses could see the exchange liquidate your entire position to pay off the loan.
Liquidation Price Explained
Liquidation prices vary depending on exchange, type of contract, type of margin, and other factors. Regardless of what goes into the calculation of that price, its meaning stays the same — it’s the price at which forced selling begins to pay off your margin loan.
Now, in cryptocurrency trading, you may meet the following two terms that describe the liquidation process — the bankruptcy price and the liquidation price:
- The bankruptcy price is where your losses equal your collateral, and you lose your entire deposit on the position. Between the liquidation and bankruptcy price, the exchange will fully close out your position to recover as much of their loan as possible, leaving you with nothing left in your trading account.
- In liquidation, the stop price equals your liquidation price—the point where selling automatically starts. The limit price corresponds to your bankruptcy price, where the forced selling ends, either recovering the full loan amount or leaving your account at $0.
For example, you buy 1 BTC at $18K with 3x leverage, putting up $6K as collateral and borrowing $12K. The maintenance margin is 25%, so if BTC drops to $8K (6K/1-0.25), you’ll get a margin call. If forced selling pushes the price down to your bankruptcy limit of $6K, where your loss equals your deposit, selling ends here. Your account balance is now $0, even if BTC starts recovering again. However, each exchange has its own policies regarding margin calls and liquidation procedures. Some exchanges may have additional risk management measures in place, such as implementing trailing stop orders, to protect your position before the liquidation price is reached.
How to Margin Trade Crypto
Margin trading crypto can be an exciting way to amplify your profits, but only if you know how to play responsibly. These are a few tips for navigating the volatile crypto market without getting liquidated:
- Start with a separate trading fund just for margin positions. Only risk a portion of your total stack in case a trade goes against you. This way one bad beat won't bust your entire bankroll.
- Use stop-loss orders. Set a price ahead of time that will trigger an automatic exit of your position. This limits your losses if the tables turn. For example, if you go long 1 BTC at $20K with 5x leverage, place a stop-loss to sell at $18K. You'll only lose $2K total, not $4K if your entire equity gets wiped out.
- Take profits incrementally. Exit part of your position in increments on the way up, don't wait until your target price. Sell 1⁄2 at a 25% gain, another 1⁄4 at 50% and let the rest ride. This way you lock in profits and reduce risk.
- Never revenge trade. After a loss, the urge is to go all-in to win it back. But that just means bigger losses. Stay calm and reassess. Look for a new setup and re-enter the market rationally.
- Practice hedging. Consider opening a short position to hedge against losses in your long position. If the market drops, your shorts can offset the losses on your longs. Close both positions once the market normalizes.
Start conservatively, learn the skills, and work your way up to higher leverage. And remember, the goal is surviving the game long enough to become an expert, not just making a single big win. With time and practice, you'll gain the knowledge to leverage crypto markets profitably.
Example of Cryptocurrency Margin Trading
If the previous instances didn't quite drive the point home, let's delve into yet another hypothetical situation.
Jimmy had a hunch that ether was about to skyrocket in value. The only hiccup? His wallet was a bit lighter than he'd like. Undeterred, Jimmy found a solution in margin trading on a crypto exchange that let him turn his $250 into a more impressive play.
With 4x leverage on his side, the exchange lent him an extra $750, giving him a cool $1,000 to invest in ether. As fate would have it, Jimmy's instincts were spot-on, and ether's price soared. He not only managed to repay his loan, but he also pocketed a tidy profit to fuel future trades or grow his capital.
However, had ether's price taken a nosedive, Jimmy's story would have had a much different ending. His position would be liquidated, and Jimmy would kiss his profits goodbye.
Margin vs Short Trading
Margin trading refers to the practice of using borrowed funds from an exchange to increase your buying power and invest in a larger position than your available capital would allow. This can be applied to both long and short positions. The borrowed funds are leveraged, which means your potential profits and losses are amplified. When you trade on margin, you're required to maintain a certain level of equity in your account, known as the maintenance margin. If your account equity falls below this level, you may receive a margin call, requiring you to deposit more funds or reduce your position.
Shorting is a specific trading strategy that involves borrowing an asset and selling it with the expectation that its price will decrease. The goal is to buy back the asset at a lower price later and return it to the lender, pocketing the difference as profit. Shorting can also involve margin trading since you're borrowing the asset you're selling short. However, shorting is specifically focused on profiting from a decline in price, while margin trading can be used for both long and short positions.
👉 On some platforms, such as Bitsgap, you don’t necessarily have to borrow the asset to short it. You can do so manually by selling an asset at a higher price and rebuying the same amount or more of that asset when the price dwindles. Moreover, to make things smoother, you can employ automated trading bots that will do the job for you by carefully observing minute market fluctuations and executing profitable trades. You can learn more about earning with Bitsgap while riding the downtrend in our article on short selling. In the article, you’ll learn that Bitsgap, in fact, has several awesome tools for shorting — smart order tools with Trailing Take Profit, Stop Loss, and OCO and an array of profit-churning crypto bots like DCA, BTD, and COMBO! Wait, but that’s not all — should you wish to test your strategies first and learn shorting without risking your capital, you can use Bitsgap’s paper trading or demo mode, absolutely free of charge!
Margin vs Cash Trading
Trading with cash carries significantly less risk compared to margin trading. When you're using your own cash balance, you don't have to worry about accumulating interest, and there's no looming threat of a margin call to spoil your day. However, margin trading provides access to additional capital, which can be advantageous if you're confident in your investment decisions. In such cases, borrowing funds from the exchange to capitalize on an opportunity might be a smart move.
The speculative sport of margin trading crypto is not for the faint of heart or wallet. This high-stakes game lets you bet big on digital currencies using mostly borrowed money, putting up just a fraction of the total chips yourself. If prices move your way, the winnings are multiplied manyfold. But if the market turns against you, your collateral can vanish in a matter of minutes.
Solution? Start with lower leverage, set stop losses, learn how to read the charts, and know your exit strategy. The rewards can be huge, but no one gets rich quick if they get liquidated on their first trade. Keep your bets small and manageable while you get used to high leverage. And remember, in volatile crypto markets, leverage is a two-edged sword!
What Is Margin Trading Meaning?
Margin trading amplifies your investment power by letting you borrow funds to buy more assets. This strategy, while potentially lucrative, also magnifies risk and can lead to larger losses. It's a thrilling ride for experienced traders seeking higher rewards, but caution is advised for newcomers.
How Does Crypto Margin Trading Work?
Margin trading in cryptocurrencies works by borrowing funds from a cryptocurrency exchange to increase your buying power and potentially increase profits. Here’s how it works:
- You'll first want to find a reputable exchange that offers margin trading and deposit your collateral, which serves as your reliable anchor.
- Next, you'll determine the leverage, which is essentially a powerful magnifying glass that amplifies your buying power, but be cautious, as higher leverage also increases potential losses.
- With your preparations complete, you can open your long or short position, keeping in mind that market knowledge is your compass in these uncharted waters.
- Now, you'll want to carefully monitor your margin account, ensuring you maintain enough equity to avoid the dreaded margin call, which forces you to deposit more funds or reduce your position. However, should your bet be correct, and the price of crypto spikes up for a long position or drops for a short, you’ll pocket a decently amplified return.
Is Margin Trading a Good Idea?
For seasoned traders, margin trading in the cryptocurrency market can be a powerful instrument to amplify their positions. However, caution is advised for those who aren't well-versed in the process.
Venturing into margin trading without adequate knowledge can swiftly lead to debt. It's essential to have a solid background in cash trades before attempting to trade on margin to avoid potential pitfalls.
Why Margin Trading Crypto Is Dangerous
Margin trading in conventional financial markets carries inherent risks, but it can be even more perilous with cryptocurrencies. The extreme volatility of digital assets means that losses can accumulate rapidly. While engaging in margin trading, it's crucial to exercise caution and avoid placing excessive funds on a single trade, as this could lead to disastrous outcomes.