What is Margin Trading?

Margin trading, also called leveraging, is a trading technique whereby investors try to boost their trade value by borrowing capital based on assets they already possess. Considering you make your margin by utilizing money supplied by a third party, margin trading is analogous to buying on credit. By amplifying trading results, this method allows investors to potentially earn more revenue on successful trades.

Margin trading is highly popular and especially suited to low-volatility markets such as international Forex. Moreover, it has also gained popularity in commodity and stock markets as well as in the cryptocurrency market recently.

Keep in mind that margin trading is considered quite risky as you have the potential to increase your gains but also your losses. Crypto is notoriously volatile and it’s possible to be liquidated in a trade gone bad.

A Look at the Top 4 Crypto Margin Trading Exchanges

Unlike traditional markets where borrowed funds are provided by investment brokers, in crypto markets, it’s fellow traders who usually provide the funds and earn interest based on market demand, investment level, etc. However, many cryptocurrency platforms/exchanges provide clients with margin funds.

In this article, we have compiled a list of the best cryptocurrency platforms/exchanges for margin trading.

1. BitMEX

Bitcoin Mercantile Exchange, or BitMEX for short, was founded in 2014, and it’s considered one of the most popular crypto margin trading exchanges in the world. Based on a peer-to-peer model, the BitMEX platform allows clients to trade derivatives instead of coins and trade futures and perpetual contracts.

BitMEX supports over ten different cryptocurrencies, including Bitcoin—which works as the base currency on the platform—USDT, Bitcoins Cash, Ethereum, and Litecoin. BitMEX only accepts Bitcoin deposits and offers maximum leverage of 100x. The exchange is not beginner-friendly and is mostly geared toward experts. Currently, they offer margin trading for six cryptocurrencies, the most famous being Bitcoin with 100x leverage and Ethereum with 50x leverage.

BitMEX has fair and competitive fees and offers advanced order types such as trailing and limiting options. BitMEX’s registration process is straightforward and only requires a valid email. Furthermore, they provide a simulated trading environment where you can use virtual money and practice virtual trading before conducting a real-world deal.

2. Binance     

Binance, the world’s largest cryptocurrency, provides a platform for trading over 200 digital currencies. Currently, Binance allows clients to borrow money in over 40 different cryptocurrencies, with average leverage of only 5x. But leverage can be as high as 125x on some assets.

Binance charges differing interest rates depending on the type of client, borrowed coin, etc. Despite being hacked in 2019 (7,000 stolen Bitcoins), the Binance exchange is highly secure. To use the margin trading option of Binance, clients are required to pass a KYC process, set a two-factor authentication, and move their money to a margin wallet where they can choose the leverage amount and specify the amount of collateral.

3. FTX

FTX is an international cryptocurrency exchanged founded by the illustrious Sam Bankman-Fried.

The exchange has grown aggressively in recent years thanks to big marketing efforts and a focus on customer support. The company offers the international FTX.com and the US-facing FTX.com.

FTX offers very competitive margin trading tools and easily one of the top choices for this form of trading.

4. Kraken

Kraken was one of the very first cryptocurrency exchanges in operation. It was founded way back in 2011 by Jesse Powell. Over the years it has been proven as one of the secure platforms to buy, sell and trade cryptocurrencies.

Kraken offers trading between crypto, fiat currencies and even provides information to Bloomberg Terminal. It’s available in 48 states and 176 countries.

In terms of margin trading options, Kraken offers up to 5x trading with an industrial-grade trading interface. The site also boasts low rollover fees.

5. Bybit

Bybit is a transparent and efficient cryptocurrency exchange and derivative platform located in the British Virgin Islands. Bybit has only four trading pairs: BTC/USD, ETH/USD, XRP/USD, and EOS/USD, with varying leverages between 50x to 100x. Bybit charges 0.075% per order for takers and an impressive -0.025% for maker fees, essentially translating into makers getting paid for each trade.

Bybit exchange does not require a KYC verification process. Please note that US citizens are banned from registering on this platform, and if found out, their accounts will be frozen. What makes Bybit an alluring choice for margin trading is its competitive withdrawal fee of just 0.0005 BTC, almost 40 percent lower than the average global withdrawal fee.

6. Poloniex

As the first cryptocurrency exchange to offer margin trading, Poloniex is one of the most distinguished names in the industry. Even though Poloniex has somewhat lost its popularity in recent years, the exchange has managed to significantly increase its market reach pursuant to decreasing trading fees to 0.2% for market takers & 0.08% for market makers.

Currently, Poloniex’s maximum leverage for margin trading is 2.5x and is among a handful of exchanges that allow clients to trade altcoins on leverage. Poloniex charges margin lenders 15% of earned interest, while the interest rate for borrowers varies for each contract.

Poloniex offers more than 50 cryptocurrencies, including all popular coins such as Bitcoin and Litecoin. Due to regulatory uncertainties, Poloniex banned its US customers from margin trading; nevertheless, you can take advantage of this feature by using a simple VPN service.

Advantage & Disadvantage of Margin trading

Crypto margin trading can be extremely risky or extraordinarily rewarding, depending on your expertise, market conditions, etc. Margin trading’s leading advantage is also its most significant drawback. Leveraging can magnify your profit; on the other hand, due to high volatility and uncertainty, it’s very likely that instead of profit, your loss will be magnified in the crypto market. But for some experienced traders, the payoff can justify the risk; after all, who doesn’t want a 100 times return on their investment?

Aside from larger profit, margin trading is a valuable tool for diversification, considering you don’t need a high level of investment capital to open and manage several positions. You can invest your additional capital for an expanded range of trades and mitigate potential losses.

A further disadvantage of margin trading is psychological rather than monetary. Leveraging borrowed money to make a profit involves dealing with interest rates—which can be much higher for digital currencies— and can be extremely stressful and anxiety-inducing for risk-aversive individuals.

What is Crypto Short Selling?

Short selling or “shorting” crypto is essentially placing a bet that crypto will go down in the future.

For instance you could take out a sell limit order on ETH/USDC and punch in the number where you think ETH could drop compared to USDC. You can also use leverage trading to increase your profit if everything goes according to plan.

Of course if ETH goes up against USDC than you run the risk of being liquidated so this is a potentially dangerous trade, to say the least.

Leveraged trading and short selling are not recommended for anyone with little experience in crypto or trading.

Margin Trading Tips for Beginners

Start Small: If you’re new to margin trading, it’s imperative to use small leverages so that you only lose a small fraction of your income if you incur any loss. As you gain more experience, you can gradually increase your trading level.

Practice Demo Trading: Almost all major exchanges provide dummy trading known as paper or demo trading. By utilizing these tools, you can master leveraged trading before risking any real funds.

Minimize Risk: There are several strategies for minimizing risk. The first is to avoid emotional investing by having a predefined goal about how much leverage you want to borrow. Other strategies are: dividing your positions into different portions, setting profit levels, and most crucially, setting up stop-loss limits.

Conclusion

Crypto margin trading is among the riskiest investment methods for novice investors. However, if used judiciously, leveraged trading can be optimal for those who want to amplify their profits and diversify their portfolio easily. If you have already decided this method is for you, then all you need is knowledge and experience. Cryptovantage offers a wide variety of crypto-related topics that cover virtually every aspect of the crypto world.  And as for experience, you can immensely benefit from the demo accounts offered by all exchanges mentioned in this article.