Coinbase has finally arrived with a margin trading option. This is just a new way for them to make money off of gambling, but they aren't saying it like this. They instead just call if margin trading.
They are beginning with a modest 3x amount of leverage for traders, and it is only available for users of Coinbase Pro within 23 U.S. States.
Margin trading, for those unfamiliar with it, allows you to execute traders with more leverage. Say you only have $100 to spare, but you are certain that if you purchase X, you can sell it later for profit. By trading with leverage (in this case, x3), you can execute that trade with $300 instead of just $100.
Margin trading can be a way for traders to increase their profits when executing buys or sells that they are certain of. It is similar to buying on credit, or taking out a loan. Or simply, gambling with the house's money.
But the danger is that, you are risking position when you trade on leverage. You agree that, if your expected outcome fails, you are taking the burn.
Remember, you are trading with 3x your position, so where is that money coming from? A lender. And that lender will want their money back. And if you fail, that means you lose your money.
Coinbase admits this: they treat margin trading as a loan. And these loans must be closed every 25 days. But they aren't marketing this as "Coinbase is now lending you money that you need to pay back with interest". That wouldn't sound very cool.
If you can’t pay your loan, you will need to sell your other assets to make up for it. And if you can’t do that, Coinbase will give you another loan to pay your first one. Again: they will automatically give you another loan if you can't pay back the first one. Don't believe me? Go read their website.
Read it on their own page: “By enrolling in margin, you acknowledge that if you haven’t paid off a loan in 25 days, you are instructing Coinbase to close your loan and open a new loan in the same amount.”
Coinbase charges a fee for margin trading. There is an 8% annual interest rate. The rate is determined hourly when you have your margin trade open. The interest gets deducted from your Coinbase Pro USD balance.
Traders need to ask themselves why major exchanges continue to implement margin trading.
Coinbase and Binance are shifting business models. They aren’t here to make everyone rich. They, more and more, are casinos, here to get users to spend as much of their money gambling in the hopes that they can score big with trades.
Margin trading is simply more profitable for centralized exchanges. I’m not calling this a conspiracy, it’s just simple math. And maybe you are a big time trader that knows what they are doing. Cool. But for everyone else I’ll say this: stay the hell away from margin trading. It’s just taking loans to gamble on trades.
A far better strategy is investing a fixed amount of money into BTC each month. Time in the market beats timing the market.