Bitcoin Margin Trading – The Basics

Bitcoin Margin Trading - The Basics

The history of cryptocurrencies is inseparably linked to numerous types of speculation. Formerly, it mainly concerned participation in direct transactions for the purchase or sale of digital coins available to users through cryptocurrency exchanges. However, in recent years, cryptocurrency margin trading has become a particularly popular branch of crypto trading, which increasingly attracts industry novices with the opportunity to get big profits quickly. At the same time, not everyone is aware of the associated financial risks.

Consequently, before taking the first steps in cryptocurrency margin trading, we recommend paying attention; do your research and study of the basics of this type of trading. 3Commas has collected the most important information on what is Bitcoin margin trading in this article.

What Is Cryptocurrency & Bitcoin Margin Trading

Margin trading refers to a type of speculation in the stock, forex, or cryptocurrency market. It consists of the use of borrowed funds by a trader provided by the exchange of choice or by a broker and other traders, who earn interest based on market demand for margin funds.

As in any other circumstance, when someone obtains credit loans, users have to provide collateral; they deposit an amount that guarantees the payment of debt obligations according to the rules established by the exchange. The margin is the name for personal funds that are allocated for the opening of such a transaction.

You will most likely come across the term “leveraged trading,” which is another term for this type of trading. It has credit leverage included: a multiplier (1–100x) that increases the user’s deposit available for a transaction at the expense of borrowed funds. Thanks to this opportunity, the trader can make a profit that is many times higher than if they were to operate exclusively with their own funds.

How It Works

There are two types of positions that a user can open on a crypto exchange or a trading platform offering this service:

  1.  Long  – when the trader expects the asset price to rise;
  2.  Short  or short sell when a bet is placed on a price decline.

If the price of the chosen cryptocurrency moves in the direction predicted by the trader, the income that they can fix increases in proportion to the selected leverage. At the moment of closing such a position, the collateral is returned to the lender (exchange) along with commission fees, and the rest of the profit received is credited to the trader’s account.

An example: if we deposit $1000 on an exchange and open a long position on Bitcoin with leverage of 10x (1:10), the amount of the open position will be $10,000 (the amount available has now increased tenfold). If the value increases by 1%, our profit will be calculated from the total amount of the transaction (i.e., $100). In total, if the position is closed at this moment, our balance will be $1100 (minus the platform commission and other potential payments determined by the rules of the chosen exchange). If there was no leverage, our profit would be only $10.

Margin Calls & Liquidation

A margin call happens when the maintenance margin requirement is higher than the remaining capital in your account. With a margin liquidation, your position is automatically closed because it has gone too far in the negative direction.

Every trade taken on the market has a liquidation price to secure the loan and ensure that you can never incur margin debt.

An important thing to remember in margin trading: for any transaction, the liquidation price is set. It is the price mark calculated by the exchange; upon reaching the mark, the position will be automatically closed with a complete withdrawal from the user’s balance of the margin that provides it.

It is not necessary to use all the assets on the balance sheet to open leveraged transactions. It would be better to allocate only a part of the deposit for opening a position, leaving the opportunity to average the position when the rate moves in the direction opposite to the expected one. This very often helps to wait out the drawdown and wait for the asset price to return to the calculated profit value.

In traditional leveraged trading, the described situation with the liquidation of a position would be preceded by a margin call. That is a requirement for additional collateral, and it consists of a notification by the broker of the client about the insufficiency of his allocated margin and the risk of forced closing of the position if additional funds are not added. However, due to the rapid movement of quotes in cryptocurrency pairs, the concept has shifted – a margin call that is not met is now called the moment of liquidation itself.

Example of a liquidation notice from BitForex Exchange
Example of a liquidation notice from BitForex Exchange

How Is Bitcoin Margin Trading Different Than Regular Trading?

When choosing leveraged bitcoin trading, it’s important to remember that it is one of the most popular and volatile cryptocurrencies on exchanges that support margin trading.

Obviously, “accidents” happen, as they say, but most of them are manipulations that are carried out to generate profits by exchanges on the liquidation of user positions. Therefore, the risks when trading with the leverage of the crypto king are particularly high, which should always be taken into account.

For the rest, Bitcoin margin trading is no different from similar procedures with other assets and may well become a profitable way of earning, provided that the above recommendations are followed.

What Are the Benefits?

There are numerous benefits of margin trading. Here are the five most important ones:

  • The fewer personal funds you have on an exchange, the better. Leverage trading allows a trader to open larger positions with only a fraction of their total capital. This way, they run less risk if an exchange is hacked or if they have not properly saved their login details.
  • An experienced day trader uses leverage to take larger positions in specific high probability situations, in which the chance of a successful trade is very high.
  • The cryptocurrency derivatives market is often more volatile than the regular market; this has to do with the larger positions that can be taken and the liquidations that occur. Scalpers often choose leverage trading in the futures market because of those moments of extreme volatility.
  • The possibility of shorting: making a profit when the price goes down.
  • The option of shorting also gives the leverage trader the opportunity to hedge their position in crypto coins without having to sell part of it. Hedging is the complete or partial offsetting of one financial risk by taking on another risk in the opposite direction.

What Are the Risks?

Margin trading also entails several risks:

  • First, using leverage allows results to be magnified. When a trade turns out wrong, an investor faces greater losses.
  • Margin trading also means that investors may have to deal with a so-called margin call, with which one can lose their investment. In a margin call, the investor has to add money or close part of their portfolio because the leverage has become too great in relation to the equity capital.
  • Furthermore, just like borrowing, the use of margin is not free. The interest sometimes depresses the ROI, and it may be flexible. The latter can cause interest costs to fluctuate. Using margin makes the portfolio more volatile. It is, therefore, advisable to keep a close eye on margin when using margin in your portfolio.

8 Best Exchanges for Crypto Margin Trading

There are a lot of verified and reputable platforms (exchanges) for crypto margin trading. Here’s a comparison chart of 8 cryptocurrency exchanges you can take a look at. All of them are partnered with 3Commas.

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# Logo Name Leverage Key Features Link
1 FTX FTX 101x
  • Futures: Yes
  • Derivatives: Yes

No deposit or withdrawal fees; low fees for different kinds of trading

Trade Now!
2 Bybit Bybit 100x
  • Futures: Yes
  • Derivatives: Yes

Fees: Starting at 0.075%

Trade Now!
3 BitMex BitMex 100x
  • Futures: Yes
  • Derivatives: Yes

Fees: 0.075% taker fee

Trade Now!
4 Deribit

 

Deribit 100x
  • Futures: Yes
  • Derivatives: No

Fees: Starting at 0.5%

Trade Now!
5 Binance Binance 5x
  • Futures: Yes

Fees: 0.1% taker fee

Trade Now!
6 Poloniex Poloniex 5x
  • Futures: Yes
  • Derivatives: Yes

Fees: 0.2% taker fee

Trade Now!
7 Kraken Kraken 5x
  • Futures: Yes
  • Derivatives: Yes

Fees: 0.02% taker fee

Trade Now!
8 Huobi Huobi 3x
  • Futures: Yes
  • Derivatives: Yes

Fees: 0.2% taker fee

Trade Now!

Bybit

Bybit

Traders can choose to use either the cross margin or isolated margin mode on Bybit. Bybit uses fair price marking to avoid liquidation caused by low liquidity or market manipulation. To open a larger position, traders may raise the risk limit to a higher tier. A higher risk limit requires a higher margin. When liquidation happens, Bybit uses partial liquidation to reduce the required maintenance margin to avoid full liquidation. If Bybit can close the liquidated position at a better value than the bankruptcy price, the residual margin will be added to Bybit’s insurance fund.

If Bybit is unable to close the liquidated position at a better value than the bankruptcy price, the insurance fund will be drawn to absorb the loss. If the insurance fund is insufficient to cover the loss, Auto-Deleverage (ADL) will be triggered. Bybit uses the insurance fund to prevent traders from auto-deleveraging.

FTX

FTX

To enable margin trading and borrowing on FTX, visit your settings page or the borrowing page.  If you turn margin trading and borrowing on, then your account will attempt to borrow any spot assets that are short.  If you turn it off, there will instead be collateral conversions to true-up any short balances.

FTX charges a fee (base 20%) on all interest payments made. Outside of that, there are no fees beyond the typical FTX trading fees.  The net fee on loans is already built into the interest rates you see (so lenders and borrowers see slightly different rates); there is no fee on top of that.

Details on how the borrowing rate is calculated
Borrowing rate = (lending rate) * ( 1 + borrower’s spot margin borrow rate)
Borrower’s spot margin borrow rate = min(500 * borrower’s taker fee, 1)

Binance

Binance

You will now be on your account dashboard. You can see your account balances from this page. Below “Balance Details,” click on “Margin” to begin the process of opening your margin trading account on Binance. You will need to have completed identity verification (KYC) and made sure your country is not blacklisted. It is also mandatory that you enable 2FA.

After transferring BNB coins to your Margin Wallet, you will be able to use those coins as collateral to borrow funds. Your Margin Wallet balance determines the amount of funds you can borrow, following a fixed rate of 5:1 (5x). So if you have 1 BTC, you can borrow 4 more. In this example, we will borrow 0.02 BTC.

Next, your margin account will be credited with the Bitcoin you borrowed. You will now be able to trade the borrowed funds while having a debt of 0.02 BTC plus the interest rate. The interest rate is updated every hour.

BitMex

BitMex

BitMEX offers leverage of up to 100:1 on some contracts. However, the amount of leverage you can access also depends on the initial margin (the amount of BTC you must deposit to open a position) and the maintenance margin (the amount of BTC you must hold in your account to keep a position open).

When leverage trading cryptocurrencies, you have two options:

  1.  Going long.  Opening a long position involves buying a contract because you believe it will increase in value.
  2.  Going short.  Shorting is when you sell a contract because you think its price will go down, and then you can buy it back at a reduced price at a later date.

When you open a position, a portion of your account balance is held as collateral for the funds you borrow from the exchange. If your trade is successful and you close the position at a profit, your collateral is returned to you along with those profits, minus any fees. However, if the market moves against you and you’re at a loss, your trade will automatically be closed, and your collateral liquidated when the market reaches a certain price – this is known as the liquidation price.

BitMEX offers a practice environment that’s set up to feel just like the real thing. This lets users get familiar with placing, executing, and canceling orders while interacting with a simulated marketplace. Get used to the feel of things here before trading with real funds.

Deribit

Deribit

Deribit is a platform aimed at experienced cryptocurrency traders who know at least how to short Bitcoin. The leverage you are trading with depends on the equity you have in your account. Deribit uses cross-margin auto leverage. For example: if you wish to trade with 10x Bitcoin leverage and want to open a position of 1 BTC in the Perpetual, you’ll need to have 0.1 BTC in your account.  The platform does have sub-accounts, so you can open a separate account for each trade.

Deribit only accepts Bitcoin (BTC) as funds to deposit. When they are able to accept fiat money, it will be announced additionally. To deposit funds, go to menu Account > Deposit, where your BTC deposit address can be found. BTC can be bought on other exchanges like Kraken.com, Bitstamp.net, etc.

Deribit keeps more than 99% of its customer deposits in cold storage. The vast majority of funds are stored in vaults with multiple bank safes.

Huobi

Huobi

On Huobi, your user level will be determined by your HT holdings and total trade volume (BTC equivalent) over the past 30 days. The data of your parent and sub-accounts will be counted together.

A user’s trade volume (BTC equivalent) in the past 30 days is calculated at 0:00 (GMT+8) on a daily basis. Specifically, the trade volume is converted to BTC based on the closing price of the trading pair between BTC and the given currency at 0:00 (GMT+8) each day.

HT holdings captured by the random snapshot taken on the previous day will be regarded as HT holdings of the day:

  • User’s level and loan limit are automatically updated at 4:00(GMT+8) every day;
  • The limit of the loan, margin, and holding of the sub-account is 1/10 of that of the parent account.

In Cross Margin trading, investors can use all tradable balance of mainstream cryptocurrencies as the margin, while a margin ceiling is applied to non-mainstream cryptocurrencies. The amount that exceeds the ceiling will not be counted as the margin. Max Available Loans = Effective Margin* (Leverage – 1) – Amount Loaned.

Poloniex

Poloniex

Once you have transferred funds to your Poloniex margin account, all you need to do to margin trade is place buy and sell orders. Borrowing is all handled automatically.

Your tradable balance is the amount of funds currently available to you for trading. Its value depends on your margin account balances, market conditions, and your open positions. The Loan Rate field allows you to specify the maximum daily interest rate you are willing to pay should your order open any new loans. Loans are always taken at the best available rate, so there is no harm in setting a value higher than the lowest rate offered. If no one is offering loans at or below the rate you specify, a trigger order will be placed instead of your margin order. When loans become available at your rate, the trigger order will grab it and place your margin order.

It is important to remember that, although you can specify your maximum loan rate when you place an order, you may end up with a higher rate if you keep an order or position open for more than two days. This is because your loans may expire after that amount of time and be transferred to new lenders at the best available rate.

Kraken

Kraken

Trading cryptocurrency is generally simple, but what if you’re looking for options that are a bit more advanced? That’s where margin trading on Kraken comes in.

Margin trading lets you amplify your gains from market swings, allowing you to execute more complex, active trading strategies. With the power of Kraken’s advanced trading engine, you can use leverage to go long or short on a variety of cryptocurrencies by up to 5x – you’ll have five times the earning potential compared to a regular spot trade.

Summary

The advantage of margin trading is that it allows investors to take larger positions. Should the investor prove right. and the price does indeed move in the right direction, the profits are higher due to the use of leverage. The use of margin can ensure that high returns can still be made, although the risks also increase with leverage.

Margin trading includes several risks, so it’s important to limit them. The first and simplest way is to limit the margin. Smaller leverage ensures that losses do not immediately lead to a margin call. Financial products are volatile, and too much leverage can lead to disastrous results. Another way to mitigate the risks of margin is by using a diversified portfolio. A diversified portfolio has the advantage that some products go up while others go down. This reduces the risk of large losses and makes the use of leverage safer.

Preparation also helps in limiting the risks. Many investors panic at losses and freeze and then see losses build up further. Drawing up a plan ensures that you know what to do in case of sudden price movements. Part of that is the willingness to take a loss. This is because many investors have a hard time taking losses, which is a known bias, as people don’t like to admit a loss.

3Commas gives you the opportunity to invest in assets on the most popular crypto exchanges. You can also use margin trading on these exchanges. You are welcome to register on 3Commas – apart from a great variety of reputable exchanges, our interface makes trading a user-friendly experience for novice and experienced traders!

 

Click here and get your 7-day free trial on 3Commas!
Disclaimer
The contents of this article are not intended to be financial advice and should not be treated as such. 3Commas and its authors do not take any responsibility for your profits or losses after you read this article. The info contained herein is based on data that was gathered from a variety of sources. This should not be used as a parameter for investing. The user must do their own independent research to make informed decisions regarding their crypto investments.

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