Binance offers a lot of different features. It´s hard to know and understand them all at once. Especially for new users, this can be quite confusing. That´s why I decided to do a "Binance for Professionals" series. This is already my second post of this series and in this post, I´ll explain what Binance margin trading is and how it works.

What Is Margin Trading?

Margin trading is definitely a method for professionals. Margin trading enables you to trade cryptocurrencies using funds that are provided by a third party. When you compare a margin trading account to a regular spot trading account, the margin account allows you to access greater sums of capital. You can leverage your positions. This means that margin trading amplifies trading results so that you are able to realize larger profits on every successful trade. This possibility to expand your trading results makes margin trading very popular in low-volatility markets like the international Forex market. Margin trading is also practiced in stock, commodity, and cryptocurrency markets.

The borrowed funds are provided by investment brokers in traditional markets. In cryptocurrency trading, it´s different. When it comes to cryptocurrency margin trading, funds are often provided by other traders. These other traders can earn interest based on the current market demand for margin funds. Sometimes also cryptocurrency exchanges are providing margin trading funds to their users.

When you are going to initiate a margin trade on Binance, you will be required to commit a certain percentage of the total order value. This certain percentage of the total order value that you have to commit first is called margin.

So there are two ways to profit from margin trading: You can lend assets from other users to perform margin trades or you can commit your assets to fund the margin trades of other users. 

Opportunities And Risks

Margin trading does not only offer you opportunities but it also involves bigger risks. It is definitely much riskier than regular spot trading.

Margin trading is usually practiced in traditional markets with low volatility but cryptocurrency markets are traditionally highly volatile. In the end, you a like a fish in the ocean where always anything can happen. Margin trading does have the obvious advantage of increasing profits as well as the obvious disadvantage of increasing losses in the same way that it can increase gains.

When you do regular spot trading, you don´t have to face the risk of losses. In margin trading, there are possible losses that exceed your initial investment. For this reason, margin trading is considered a high-risk trading method. 

In general, lending assets from other users to perform margin trades is riskier than committing assets to fund the margin trades of other users. 

How To Margin Trade On Binance?

Besides the regular spot trading, you can also do margin trading on Binance. Of course, before you can make your first margin trade on the Binance exchange, you have to register on Binance first. For margin trading, you will need to have fully completed your identity verification (KYC). It is also mandatory that you have enabled 2FA on your Binance account.

When you are set up with your Binance account, navigate to the margin trading area, confirm that you have understood the risks associated with margin trading, and agree to the terms and conditions. 

For some jurisdictions like the USA, Binance margin trading is unfortunately not available. Please check by yourself if margin trading is available in the jurisdiction you are living in or not.  

Click on the I understand button and your margin trading account is ready to use. 

After you have successfully activated your Binance margin trading account, you will be able to transfer funds from your regular Binance spot wallet to your margin trading wallet.

After you have transferred funds from your regular spot wallet to your margin trading wallet, you will be able to use these funds as collateral to borrow funds from a third party. The balance of your margin trading wallet determines how much you can borrow. The calculation follows a fixed rate of 5x. This means that if you hold one Bitcoin in your margin trading account, you can borrow four more and trade with five. 

Select the coin and the exact amount you like to borrow and click the “Confirm borrow” button. Now, your margin trading account will be credited with the funds you borrowed, and you will able to trade the borrowed funds. You are in debt with your borrowed funds plus the interest rate that comes on top. The interest rate is updated hourly.

In your margin trading account, you will see your margin level giving you a risk level according to the borrowed funds and to the funds that you are holding as collateral on your margin trading account.

The risk level is constantly changing according to the market movements. In case that the prices are moving against your prediction, your funds can be liquidated and you will be charged extra fees on top of the liquidation.

Keep in mind that at some point you should also repay your debt and secure any gains you made with margin trading. Make sure that you constantly monitor your margin trades to see if you are moving in the right direction. 

My Final Thoughts

Margin trading is definitely a method for professional traders. On the one hand, you can realize bigger profits by using the funds of a third party. On the other hand, there are also risks involved as this method of trading can also amplify losses. It´s like providing liquidity on a decentralized exchange where you have to face the risk of impermanent loss. In the end, wherever there are great opportunities in the cryptocurrency space, there are also risks involved and it is up to you to decide if you are willing to take them. Because the volatility of cryptocurrencies is quite high, margin trading should be approached carefully. It´s is a method for professionals and surely not for beginners.

Finally, I also like to remind you that my intention in this post is to raise your awareness of Binance margin trading and my intention is not to replace your own research.

If you are not registered on Binance yet, you can use my referral link with the invitation code E3PGAJCE for signing up. When you use it, it will save you some trading fees every time you are performing a trade on Binance. Don`t forget about this possibility when you introduce a friend to cryptocurrency as it will save both of you some money. 

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