Margin trading crypto➤Btcman explains "What is margin trading crypto?"

Margin trading is gaining popularity and is considered one of the profitable options. In this article, we will explain what it is and discuss strategies while sharing useful tools.

What is margin trading crypto?

Margin crypto margin trading in the cryptocurrency market is a strategy where borrowed capital is actively utilized. This is done to increase one's capital when forming trades. The idea is for the trader to engage in trading with larger sums than their own capital. Such borrowed funds provide more opportunities.

Here, one can count on a significant increase in profit. However, this can also elevate the risks. First and foremost, it's necessary to invest a small amount of your own funds. This will serve as the margin, which will be reflected as a percentage. Many exchanges offer low values.

Then, the process of making trades continues by using increased volumes of cryptocurrency. The trader can buy (open "long" positions) or sell (open "short" positions) cryptocurrency depending on their price movement predictions.

With the right price movements, the trader can make a profit. Earnings are determined by the difference between the opening price and the closing price of the position.

Exchanges may specify a "margin trading crypto level," indicating the minimum margin level that must be maintained in the trader's account. If losses from positions lead to the margin level falling below the specified "margin level," the exchange may require the trader to deposit additional funds (margin) into the account to support the positions.

However, there are certain risks associated with margin trading. Borrowing funds increases the risk, as even a small price drop can result in substantial losses that exceed the initial margin. If the margin level falls below the established exchange level, to minimize risks, it is recommended to read about how to short crypto guide by Btcman.

Lending

Lending platforms operate as intermediaries between borrowers and lenders in the cryptocurrency environment. Users can lend their cryptocurrency assets to other users under specific conditions and interact through smart contracts or centralized platforms.

The key concept in this process is collateral. Collateral is an asset or cryptocurrency that a borrower provides as security for the loan. It can be used to reduce the risk for the lender in case the borrower fails to fulfill their loan obligations. If the borrower doesn't meet certain requirements, the lender can use the collateral to compensate for losses.

Potential risks for margin lending crypto include:

Risks for Borrowers	Risks for Lenders
Collateral Loss Risk:	Borrower Default Risk:
If borrowers fail to fulfill their loan obligations,	If borrowers fail to repay the loan, lenders can lose their funds.
their collateral may be forfeited.
High Loan Interest Rates:	Market Volatility:
Some platforms might set high interest rates for	The cryptocurrency market is highly volatile,
using the loan, making borrowing expensive.	and price fluctuations can affect the value of the collateral.

To mitigate these risks, it's recommended to:

• Thoroughly verify borrowers and lenders before entering into an agreement;
• Avoid putting all cryptocurrency assets at risk in a single loan or with a single borrower;
• Develop a risk management strategy and adhere to it for both borrowers and lenders.

Lending platforms can be beneficial for those seeking to borrow against their cryptocurrency assets as collateral.

Cross and isolated 

We offer a comparative table about trading crypto on margin:

Aspects	Cross (Cross)	Isolated (Isolated)
Definition	The user uses the entire balance to open a position.	The user can allocate a portion of the balance as collateral for a specific position.
Collateral Application	The overall balance serves as collateral.	The user can allocate only a specific amount to cover a particular position.
Impact on Other Positions	Opening a position doesn't affect others.	Significant losses in one position may affect other positions through the overall balance.
Risks and Protection	Losses can lead to liquidation of all positions upon balance decrease.	Losses are limited to the remaining balance allocated for the specific position.
Flexibility	Less flexibility in position management.	More opportunities for risk management and position selection.

Margin call and liquidation

The platform and the trader take the following steps:

• If the position approaches a "crypto margin call," the platform may send a notification to the trader. If the margin continues to decrease, the platform may require additional funds (margin) to maintain the position. If the trader does not add extra margin, the platform can automatically liquidate the position.
• The trader can respond to the platform's notification by adding additional margin to preserve the position. If the trader does not take action or add margin, the platform will automatically liquidate the position.

The process of position liquidation involves the platform selling or buying the asset at the current market price to close the position. This can lead to losses that may exceed the initial deposit. Liquidations are also used as a market analysis indicator. When liquidations are substantial, it can indicate high volatility or sudden price shifts, which can be crucial information for traders.

Our website provides access to liquidation metrics on cryptocurrency trading exchanges, helping traders track liquidation volumes and obtain information about market activity and stability.

Difference between margin, futures, and spot trading

This is a general comparative overview of traditional financial trading and cryptocurrency trading.

Aspects	Traditional Trading	Cryptocurrency Trading
Contracts	Traditional financial instruments like stocks and bonds.	Cryptocurrency platforms use cryptocurrency contracts or tokens.
Payment Methods	Fiat currency (money) and bank transfers.	Cryptocurrencies and cryptocurrency transactions.
Duration	Long-term and short-term investments.	Short-term, long-term trading, and day trading.
Risk Level	Risks related to market volatility, economic factors.	High cryptocurrency volatility, cyber security risks.
Advantages	Opportunity to invest in a wide range of financial instruments.	High liquidity, 24/7 availability, short-term trading opportunities.
Disadvantages	Typically limited by exchange and bank operating hours.	High volatility can lead to significant losses, cyber attack risks.

Both approaches have their advantages and disadvantages, and the choice between them depends on the trader's objectives, risk appetite and available resources.

Example of a margin trade

Let's consider a margin trading crypto example where a trader starts with a capital of $10,000. They use an isolated margin approach, allocating $1,000 as margin to open positions. The trader believes that the price of Bitcoin (BTC) will rise, so they open a "long" position by buying 1 BTC at the current price of $40,000.

After a certain period, the BTC price increases to $45,000, and the trader decides to close their position, making a profit. 

Their profit is determined by the difference between the opening and closing prices of the position:

• Profit = (Closing Price - Opening Price) * Position Size;
• Profit = ($45,000 - $40,000) * 1 BTC = $5,000.

In this case, the trader successfully executed a profitable trade. However, let's consider potential risks and scenarios:

Margin tools

Traders can leverage interesting tools to facilitate many trading processes, thus saving time and obtaining clear information on demand. In the context of margin trading, essential analytics and accurate calculations can be achieved through specialized calculators and trading bots. More on this below.

Trading Bot

Advantages of crypto margin trading bots include speed, as bots can execute trades instantly, and the ability to operate around the clock without human intervention. They can analyze market data, trends, and indicators faster than humans, potentially resulting in more favorable trades.

Many advanced centralized exchanges offer pre-built trading bots and the option to create custom strategies. Users can also utilize third-party software like 3Commas, HaasOnline, or create their own bots using programming languages and APIs.

Crypto margin trading bots automate margin trading in cryptocurrencies, utilizing algorithms for fast and potentially profitable trade execution. Despite the benefits, such as speed and continuous operation, traders should be aware of associated risks and carefully manage bot strategies.

Crypto margin calculator 

Margin trading calculator crypto plays a significant role in margin trading, aiding traders in planning and managing their trading operations. They compute the necessary margin that must be maintained in an account to open and maintain positions. They help traders avoid a "margin call," a situation where insufficient margin triggers the forced closure of a position.

Additionally, they enable traders to comprehend how much capital they need to retain in their accounts to initiate positions with a certain risk level. This contributes to reducing losses and enhancing the manageability of their trading strategy.

Examples of popular crypto margin trading calculators include the Bitfinex Margin Calculator, Binance Futures Calculator, and Kraken Margin Calculator.

Where to margin trade crypto

Centralized crypto margin trading platforms (CEX) and decentralized exchanges (DEX) are trading platforms for cryptocurrencies and other digital assets. Here are their key characteristics and differences:

CEX

CEX platforms typically have higher liquidity due to higher trading volume. They are usually more user-friendly, offering a greater variety of financial instruments and features. However, their security relies on a centralized structure, making them susceptible to hacking attacks. Users must entrust control of their private keys to the exchange, which exposes them to the risk of losing funds.

The trading process on CEX involves user registration, providing personal data, and undergoing verification to adhere to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) policies. Additionally, users can utilize leverage (margin) to increase their trading capital and potential profits, but this comes with the risk of losing more than their initial investment. 

Examples of CEX include Binance, ByBit, and Kraken.

DEX

DEX, on the other hand, does not require users to surrender their private keys to the exchange. This is because trading occurs directly from users' crypto wallets. Decentralization in DEX offers greater control over finances. These platforms are built on blockchains and leverage smart contracts to automate trading and settlements, reducing the need for intermediaries.

DEX offers advantages such as higher security due to the absence of a central vulnerability point, access to financial instruments with confidentiality and anonymity, and lower liquidity compared to CEX. However, there are risks associated with smart contracts, which can have bugs or imperfections that may lead to potential loss of funds.

Examples of DEX include AAVE, DeFi Saver, and Gearbox. When choosing between CEX and DEX, it's important to consider your individual needs, risk tolerance, and convenience in using the platforms.