How "Margin Trading Crypto" Works (Leverage)

How "Margin Trading Crypto" Works (Leverage)


Leveraged Trading】allows you to increase your exposure on a financial market against a relatively modest capital investment.
The broker will ask you to pay only a small part of the total position value. The remainder of the capital will be made available by the broker. However, your profit or loss will be based on the entire exposure. So the sum you earn or lose could be much higher than the capital actually invested.
The initial outlay is called a "margin or deposit requirement". Your provider will request it to cover all or part of the losses you may potentially incur. The margin is usually a small part of the entire exposure.
Some products require fixed margins for each contract, while in other cases it is calculated as % of the position value.

 

GENERAL EXAMPLE
Wanting to buy 1000 shares whose cost is 1 euro, the operation would cost me 1000 €. If each of these shares goes up 100% I would end up with € 2000 (therefore a proceed of € 1000). Let's say, however, that I don't have 1000 €, using leverage and having a 10% margin I would only advance 100 €.

Exposure = € 1000 
Margin = 10%
Investment = € 100
Leverage = 10:1

It is evident that this operation apparently seems less risky. My initial disbursement is only € 100 if each share doubles in value, my profit is always € 1000 but I have anticipated only € 100 and not € 1000.
However the broker asks for the total exposure in exchange so this amplifies not only the potential profits but also the losses, which can sometimes even exceed the initial deposit in case the market moves against you.
The main advantage of leverage is that it allows you to maintain more liquidity in your portfolio, since you only need to constrain a small part of the capital.

By using this type of Trading it is possible to earn even when the markets are at a loss:

🅻🅾🅽🅶: buy
🆂🅷🅾🆁🆃: sell

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Through leverage it is possible to operate with less liquidity and increase the multiplier as we have seen (both for better and for worse).
With a 3: 1 leverage (3x) if I have 1 🄱🅃🄲, I can borrow 2 more. The overall position will be 3 BTC (both for the better and for the worse). I have 1000 € in BTC but I borrow another 2000 € -> 3.000 €. If my expectations of gain / loss are 10% and I am using a 3:1 leverage (3x) I will have gains / losses of € 300 multiplied by 3 (€ 900). I can automatically renew the loan or close the position. The renewal of the loan involves additional fees. The losses cannot exceed my initial position so at 1000 € you are liquidated.

𝕃𝕚𝕢𝕦𝕚𝕕𝕒𝕥𝕚𝕠𝕟: forced closure of the attached position at risk of default (if we risk not being able to repay the loan). Some of these platforms have often been accused of insider trading (some users knew market movements that others didn't know) and wash trading (creating artificial transactions to manipulate the market, liquidating positions).

BitMEX is famous for its low fees, high volumes and the possibility of leveraging up to 100x.
On this exchange, the loan is executed directly by the broker himself. This does not impose deadlines on the latter, unless, of course, the margin is put at risk.
On BitMEX you can also operate short and long on other cryptocurrencies, such as ETH, EOS, XRP, etc
Other well-known exchanges on which Margin Trading is available are Bitfinex (linked to the stablecoin Tether) and Bybit.

BitMEX and Bitfinex are very controversial exchanges, in a future article I will explain the reasons.


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