Cryptocurrency Investments Part XI. Margin trading.
The entire history of the existence of cryptocurrencies is inextricably linked with various types of speculation. Previously, their main part concerned participation in direct transactions on the purchase / sale of coins actually available to users through exchangers and cryptocurrency exchange exchanges.
However, in recent years, margin trading of cryptocurrencies has become a particularly popular branch of crypto trading, which is increasingly attracting newcomers to the opportunity to get fast super profits. Moreover, not all of them are aware of the attendant financial risks. And they, of course, are.
Therefore, before taking the first steps in margin trading in cryptocurrency, it is recommended to pay attention to studying the basics and features of this type of trading.
The definition of “margin trading” refers to a type of speculation in the stock or cryptocurrency market, which consists in the use by a trader in his activities of borrowed funds provided by the exchange.
As in any other situation with obtaining credit loans, the user must provide a security deposit - in this case, deposit an amount guaranteeing payment of debt obligations according to the rules established by the platform. Own funds allocated for opening such a transaction is a margin (hence the name of this type of speculation).
You can also come across the term “leverage trading”, which is an alternative designation for this type of trading due to the presence of leverage — a multiplier (1–100x), which increases the user's deposit available for the transaction at the expense of borrowed funds. Due to this feature, the user can make a profit many times greater than that which would have been present during the speculation exclusively by their own means.
For example, if you deposit $ 1000 into a stock exchange offering this service and open a long bitcoin position with a leverage of 10x (1:10), the amount of the open position will be $ 10,000 (the amount available to the trader has increased tenfold). If the price increases by 1%, the user's profit will be calculated from the total transaction amount, i.e. will be $ 100. In total, when a position is closed at this moment, the trader’s balance will be $ 1,100 (minus the site commissions and other payments defined by its rules). If there was no leverage, the profit would be only $ 10.
An important point in margin trading is that a liquidation price is set for any transaction — a price calculated by the exchange, upon reaching which the position will be automatically closed with a complete withdrawal of the margin that provides it from the user's balance.
That is, if, in the example described above, a long deal was opened at a bitcoin price of $ 10,000 and the liquidation price was set at $ 9,500, a fall in the rate to this mark would lead to a loss of $ 1,000 contributed by the trader.
It is also worth paying attention to the fact that in the cryptocurrency margin trading there are two main types of orders:
1. Perpetual contracts, when the position is open until the user closes it or liquidation occurs;
2. Futures contracts that close automatically when they expire.
What should always be remembered in margin trading?
1. Margin trading in cryptocurrency is a type of taking a loan, which will have to be repaid, at least with the payment of established commissions, and at most with the loss of the body of the deposit. Thus, you can keep yourself from taking rash actions in the form of taking too much leverage or using the entire deposit to trade;
2. Unreasonable opening of transactions with leverage by the user without a serious level of trading skills is likely to lead to a loss of deposit;
3. The choice of a cryptocurrency asset for margin trading should be done based on an analysis of its volatility. To open a transaction, it is recommended to choose periods when the probability of occurrence of volatility is minimal - sharp price jumps in different directions, with the help of which the market maker tries to get as many traders out of positions as possible. Ideal options are trading with the shoulder of pairs of altcoins to bitcoin, on the charts of which predictable repeated fractals are traced;
4. A failed transaction can be completed independently, without waiting for the moment of liquidation. At the same time, instead of the entire position, only part of the margin from the user's balance is lost (professionals try not to allow more than 20% loss). This can be done not only manually, but also with the help of the “stop loss” setting (English stop loss - stop loss), which is a type of order to limit trading risks, which implies automatic closing of a transaction when a certain price level is reached;
5. An open position that will soon be liquidated can always be averaged by purchasing additional contracts and thus save it from closing. However, many professionals believe that this is the way to drain the deposit.
Most importantly, you must remember that leverage works both ways.
If you are promised superprofit - this does not mean that you will receive it.
Do not confuse luck that smiled at you with skill.
If you are just buying cryptocurrency, you can just wait if the rate has gone down to any mark. Until you sell the asset, you have not recorded a loss. That is, you bought BTC for $ 9,500, then the rate fell to $ 100, and then rose to $ 10,000. You made a profit of $ 500. This can not be the case with leverage.
The exchange will not let you go negative in relation to your debts.
If you choose a leverage of 1: 100 and trade your entire deposit, then it is enough that if the cryptocurrency rate went the other way by 1%, the deposit is lost.
You can see the full range of investments in cryptocurrency here.