Queconomics – Margin trading crypto is a term that should be known for Crypto traders. It is refers to the act of borrowing additional cryptocurrency by utilizing your available cryptocurrency to buy additional cryptocurrency.
The term “margin trading’ is also called ‘leverage trading’. The main idea of this concept is an ancient method used in the traditional markets.
The Concept of Margin Trading Crypto
The concept of margin trading that is now used by traders was born in the US. Numerous exchanges are now practicing it. However, there are many regulations and rules in the traditional markets related to margin trading.
Whereas the margin trading used for cryptocurrency is not really complicated, it is quite simple. However, the main principle between both trading is remains the same.
We will take an example. Assume you only have $1000 but you want to invest $2000 in BTC. To bring an extra $100, you need to borrow on a 2:1 margin. 2x, meaning you will get an extra one dollar for every dollar you have.
Let us assume that the price of BTC goes up by 50% as well as your investment. Now, you have $3000 from the $2000 you invested. So, you can pay back and liquidate $000 to the lender and get your $1000 profit (assuming 1 BTC = $2000).
But on the other hand, if the price of BTC falls by 50%, your investment also decreases to $1000. The lender will claim your remaining $1000 for its right. Now, you lost your initial $1000 and have nothing.
Who Provides This Crypto Investment?
You may wonder, who is the provider of this investment and why do they do that? Well, individuals or brokers acts as lenders here and provide their BTC or money with the interest rate for margin traders.
If there is a margin trader’s portfolio which is underperforming and does not meet the agreed conditions, the broker will be automatically closed the trader’s position.
This is in order to save and refund the lenders so that they will not lose their principal and interest first. On the other hand, if the trader’s portfolio is good, according to the terms of the trade, lenders pay their interest regularly.
And this is why the term ‘leverage trading’ is also used. For example, leverage is 50:1, meaning that $2,000 BTC/equity is needed to buy $100,000.
Now, you may be interested to trade cryptocurrencies on margin. Well, you can find some specialized margin trading crypto exchanges for doing that.