One of the ways to make money with cryptocurrencies is to trade.

Typically referred to as day trading, it can bring high rewards but also extreme risks, depending on the trading methods used and, of course, competency of the trader. Although margin trading carries the highest risk, it also brings enormous rewards, which is why many are interested to give it a try.

For those who do not know, margin trading is a type of trading in which you trade with the money you borrowed through the trading platform. This is called leverage.

Here’s an example to show you how it works:

Let’s say you have $100 and want to trade on margin. Depending on the platforms, the amount of money differs. It can be anywhere from 2x to 100x. Let’s say you leverage (borrow) $1000 with an existing $100 to trade (10x leverage). If you earn 5% profit while trading, that would be $50. Translated to your initial amount of money, that’s 50% profit. This is what makes it so attractive.

Traders with limited resources tend to look for opportunities to earn more while trading cryptocurrencies. Margin trading allows precisely that — making more money with limited resources by adding leverage to the investment or position. This increases the amount invested without actually holding the assets.

Before we go into details, it is essential to say that margin trading carries a very high risk, and it can lead to significant losses if not done correctly.

What is Margin Trading?

Simply put, margin trading is trading with the money borrowed from the broker. It can be seen as taking a loan from your broker.

Although trading on a margin doesn’t provide leverage in itself, it can be used to create leverage. This is because the amount you are allowed to trade on a margin directly depends on how much money you currently have in your account. Some exchanges allow up to x100 leverage, but typically it’s x2 to x6. For example, if your cash account holds 50,000 USD with x4 leverage you would be able to use up to 200,000 USD for trading.

Margin Trading Account Requirements

Trading on margin is usually separated from crypto-cash trading on the exchanges. Some require a certain amount of cash in order to use the margin — for example, Bitfinex requires a deposit of 10,000 USD just to get registered.

Also, loaning money from your broker (exchange) is not free. The margin needs to be returned with interest, and different exchanges charge different interest rates. The interest rates for margin trading are usually lower than personal loan rates, making it more attractive to borrow through the broker than to take a personal loan.

Who Can Participate in Margin Trading?

Margin trading carries additional risks since you are trading the loaned money too. Additionally, managing the margin account to maintain a sufficient cash balance can tricky to master as market prices are constantly changing. For these reasons, margin trading is something to be considered primarily by experienced traders who are comfortable with managing risk and completely understand how margin trading works. If you aim to use margin, consider diversifying your portfolio to protect your assets against sudden changes in the market that can lead you to fall below your margin account minimum (below which the position gets liquidated).

Benefits of Margin Trading

Increase Buying Power and Profit Potential

Margin trading offers the ability to increase buying power and, subsequently, potential profits from trading. Margin trading allows you to buy more cryptocurrency than you would be able to buy with the cash on hand. The exact increase in purchasing power depends on your broker (from x2 to x100, or even higher). This increases your profits since each peak in coin’s value is multiplied by your margin value (from two to one hundred times).

2. Take Advantage of More Trade Opportunities

One of the great features offered by margin trading is taking advantage of multiple trading opportunities. Margin can, and often should, be used to buy various coins rather than invest in a single coin. For example, if you take 10,000 USD in the margin, you could buy 2,500 USD worth of four different coins to manage your risk better while at the same time increasing your opportunity to profit.

3. Short Selling

Another great benefit of margin accounts is the ability to short sell, which gives profits when a coin’s price falls. This means it is possible to make money even in the declining market, which is something experienced traders often take advantage of.

Risks of Margin Trading

Margin Calls

The dreaded margin call, which informs you that your account’s balance is below the minimum amount required to maintain your trade is a significant risk of trading on margin. When you receive a margin call, you have a limited window of time to either deposit more funds or sell some of your coins bought on margin. Basically, this means if you don’t have extra cash to add to your margin balance you could be forced to sell at a loss instead of waiting out a low price period.

2. Interest Charges

Another downside of margin trading is obviously the interest on your loan. Although margin interest rates are typically lower than personal loan interest rates, the amounts can quickly add up if you perform frequent margin trades.

3. Additional Trading Risk

Trading with double (or higher) buying power also means that your potential loss is also doubled if a trade goes wrong. This is why the diversification of the portfolio is important. Many inexperienced traders are not prepared both financially and psychologically to handle a portfolio that comes with increased buying power. Margin trading also brings many psychological risks as the beginners, usually encouraged by initial success, bite off more than they can chew. This potentially can lead to huge losses, which inflict a lot of stress to the trader. It is important to consider these risks before starting trade on a margin.

Conclusion

Margin trading is a great way to boost purchasing power, especially if you are an experienced trader. However, it comes with significant risks, particularly if used incorrectly. Make sure to understand the margin trading well and diversify portfolio before jumping into margin trading.

If you are looking to make significant profits without additional risks associated with margin trading, maybe crypto arbitrage could be your cup of tea. We at ArbiSmart offer anywhere from 0.1% to 1% daily profit, depending on the size of your investment.

We hope you will enjoy this exciting part of the cryptocurrency world. And if you have any questions, feel free to reach out to us any time.