Margin trading, is simply trading assets on loans. This increases your earning capacity, without increasing your capital investment. Like any honest means of making high potential profits, some effort, as well as risk, are required. However, if you understand its features well, risks can be minimized.

Margin trading Explained

While all trading requires some form of price speculation, margin trading involves more than speculations. The predictions with margin trades are made with borrowed funds, usually called leverage. The margin, which means “pledge,” now serves as a security/collateral for the leverage.

With this leverage, traders can buy and sell as many cryptocurrencies as possible, several times, using their margin, plus the borrowed funds. The profit, from a successful trade, is calculated based on the total funds, leverage, and margin in all.

Let’s have a practical outlook on a margin trade done by Cindy

Cindy, a trader at PrimeXBT, has a Bitcoin deposit worth 700 USD, at the time. From her observations and analysis, she is confident the price of Bitcoin is going to grow significantly.

So she takes a 1:100 leverage, which is 100X her margin (that is her initial deposit of 700 USD.) This leaves her with 70,000 USD worth of Bitcoin.

Also at the time of this speculation, the value of 1 BTC was worth 7,000 USD, which all rounds up to 10 BTC, for all 70,000 USD worth of BTC.

A Side Note: By implication, a leverage of 1:1 is a 100% top-up on Cindy’s margin. However, a 100X leverage is the highest leverage offered on any crypto exchange, out there. What is more, very few exchanges like PrimeXBT offers as much as 100X.

If the value of Bitcoin increases by 10% after one week, the total value of Bitcoin in her possession is, therefore, a 10% extra of all 70,000 USD, which is 7,7000 USD. This leaves her with an additional 7,000 USD as profit, including a little amount for leverage-fee, as it is with every type of loan.

Also, if she decides to reverse engineer the process, by selling off her leverage immediately she collects them; In hopes that the value of Bitcoin will drop significantly. If it does drop as expected, say by 10%, and she buys back the same quantity of Bitcoin at a lower price, then she just had a short sale. It is the direct opposite of holding a long position.

However, if she didn’t collect any leverage for the trade, and traded only with her initial deposit of 700 USD, she would have received a little sum of 70 USD as profit; this, however, doesn’t include any fee.

With accurate speculation, everyone profits — Cindy pays off her loan with due interest and gains a massive profit for herself. However, if the speculations are wrong, say the price of Bitcoin drops, so much so that her initial margin isn’t enough to cover for the loss and the interest on the leverage, the exchange will have to seize all that’s left to break even. This point of breaking even is usually called a “margin call.”

Hence, every trader needs to be reasonably sure of the information that builds their speculation. On a side note, to prevent a margin call, traders can top-up their account just enough to keep the margin from getting swallowed up by a margin call.

One significant difference between a margin trade and other forms of trade is that, for non-margin trades, the trader is not liable to the exchange, even though, the price fluctuates. However, reverse is the case for leverage trades.

In the following articles, we gave several tips and secrets on how to trade on margins successfully, at PrimeXBT.

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