Cryptocurrency margin trading is nothing but brokers/trading platforms allowing the trader a temporary loan which can be used to buy or short-sell a certain cryptocurrency. It allows you to buy or short-sell more than you otherwise would. However, if the trade goes the other way, the broker/trading platform will automatically exit your existing position when your own capital is spent. That way, they prevent losses on the capital they borrowed, as well as preventing the unlucky trader from making a loss they cannot recover from financially.

Both institutional and retail traders use margin trading due to its many advantages. The main advantages of margin trading are:

Leveraging gains;

Reduces or eliminates divesting;

Diversification potential.

Leveraging gains

Buying cryptocurrency by utilizing margin enables you to leverage your potential gains by allowing you to buy more cryptocurrency than you could if you were doing so by only using your available capital. Leverage is the single best advantage of margin trading, as it exponentially increases your profit potential.

Example: You want to enter a BTC/USD long (buy) position that is worth $100. If BTC moves up 1%, your gain would be 1% minus trading fees. However, by leveraging your position of up to 100x (check out PrimeXBT trading platform which offers margin of up to 100x) that same 1% move on BTC/USD can net you up to 100% gains! Leveraging your position surely brings some risks, but any net positive trader prior to using leverage will be much more profitable after utilizing it. It is no wonder that almost all of the institutional traders and bigger retail traders use margin when trading.

Reduces or eliminates divesting

Trading cryptocurrencies on margin allows you to take advantage of trading opportunities as they arise, without having to raise funds by divesting your existing investments or from other sources. This way, your other positions can be open and will not have to act as emergency funds if better opportunities come up. Margin trading is an extremely convenient way of “raising” capital as it usually has extremely low interest rates, and because it is safe as it does not allow going into debt.

Diversification/hedging potential

Margin does not have to be used to only increase single trade positions. It can also be used to properly diversify and/or hedge your portfolio. This way you can keep the profit potential of the previous entries, but reduce the overall risk of the portfolio.

If a portfolio is concentrated on one group of cryptocurrencies, (as an example, in the niche of virtual reality) we can use margin to diversify into other cryptocurrencies or niches. On the other hand, if a portfolio is already diversified but requires some hedging, we can do so by using margin trading and hedge by utilizing perpetual swaps or options (on the derivates markets).

Summary

Margin trading is a great way of increasing the overall market presence as well as potential financial gain. If used properly, it is surely the single best feature for a trader to have. Make sure to check out PrimeXBT, a trading platform for both beginner and professional traders which allows margin trading of up to 100x.