Read this complete crypto margin trading guide for beginners to maximize trading gains and avoid many margin trading pitfalls. In simple words, margin trading helps you take bigger trades with a relatively small amount of capital. So, if you have some convincing reasons to bet big on a particular trade, margin trading can help you make significant profits even on a small investment.
So, how does it happen? Suppose BTC is trading at $30K and you expect it to reach $36K in two months - i.e. you are forecasting a 20% price growth. Now, if you have only, let’s say, $100 in your trading account and you invest it today, you will only be able to make $20 in 2 months.
Now, what if you could buy BTC worth $1,000 or $2,000 with the same $100 capital? This would have helped you earn $100 or $200 on the same capital. This is what margin trading looks like. So, margin trading is a great way to amplify your gains even for a very small initial capital.
However, it’s not always a win-win case. Margin trading is quite risky too. While trying to augment gains, many traders end up multiplying their losses. So, you must know the risks pretty well before using margins for crypto trading. In this guide to crypto margin trading, we are going to discuss all aspects of crypto margin trading, including:
- Meaning and concept of margin trading
- Advantages and disadvantages of margin trading
- Risks associated with trading crypto with a leverage
- Best crypto leverage trading platforms
- Long vs. short trading in crypto
- Margin trading vs. spot trading
- 1. Crypto Margin Trading Explained
- 2. How Does Crypto Margin Trading Work
- 3. Long vs. Short Margin Trading
- 4. Isolated Margin Trading vs. Cross-Margin Trading
- 5. Benefits and Risks of Crypto Margin Trading
- 6. Top 3 Platforms for Crypto Margin Trading
- 7. Tips and Strategies for Profitable Crypto Margin Trading
- 8. Crypto Margin Trading Guide - FAQs
1. Crypto Margin Trading Explained
Crypto margin trading is a facility provided by leading crypto exchanges like KuCoin or Bybit to allow you to take bigger trades for a small capital. So, using margins, you will be able to buy cryptos worth $10,000 for smaller capital of, let’s say, $1,000. You are only required to set your initial capital as a margin and the exchange lends you the remaining funds.
Margin is a win-win game for both you and the exchange. It allows you to take bigger trades for small capital. This means you can increase the extent of your gains without committing any additional investment. The exchange is going to lend you to help you trade big. You can return the borrowed funds to the exchange after closing the leveraged trade. Learn more about our list of the best crypto exchanges for 2024 after reading this guide.
Margin trading is beneficial for the exchange because when it allows you to trade a bigger amount, the trading fee also increases (remember that the trading fee & commission are often calculated as a percentage of your trade value). Moreover, you need to pay interest to the exchange for the borrowed funds based on the duration of your borrowing. In this crypto margin trading guide for beginners, let’s now look at how margin trading works.
2. How Does Crypto Margin Trading Work
In crypto margin trading, you as a trader are basically going to enter into a leveraged trade to buy/sell cryptos worth much more than your available capital. While the leverage can go up to 25x depending on the exchange, most leading exchanges provide 2 to 5x leverage. When the leverage is 5x, this means you can enter a trade worth $500 for a margin (or required capital) of just $100. Because of this use of leverage, margin trading is also often called leveraged trading.
The 2x or 5x discussed above are called leverage ratios. If you want to trade on margins, you must check the maximum leverage ratio of your exchange. This will help you determine the extent of leverage that you will be able to take.
When you enter into a margin trade, the exchange will inform you regarding the margin required for a particular total value of your trade. You may have to deposit an additional margin later depending on the direction of the trade. For example, suppose you entered into a trade expecting ETH to go up. However, if the market moves in the opposite direction and your position starts making losses, the exchange may call for additional margin. This is called ‘margin call’.
If you fail to add additional margin after a margin call, the exchange may liquidate the position to prevent further losses. In case you close a position in profit, you get to keep your profits after paying the trading fees and interest charges to the exchange. Have you ever wondered how to buy Ethereum? If yes, then we invite you to check out our beginner's guide to purchasing ETH for all the answers you need.
3. Long vs. Short Margin Trading
When we think about crypto trading, we generally think of buying crypto at a low price and then selling it when the price goes up. This is called a long trade in which we are expecting a crypto coin to go up in price. However, it’s also possible to make money when a crypto is expected to fall in price.
How can that happen? Let’s explain. Suppose, you expect an adverse regulatory norm against cryptos and you are anticipating the market to fall. So, you can take a trade to sell first and buy later when the price has fallen significantly. This type of trade is called short trade or short selling. Short trades are extremely famous amongst crypto traders because in crypto the market crashes tend to be more aggressive than the upward movements.
Before you continue reading, we would like to remind you that you we have published a range of tools to assist you on your crypto journey. For example, our 'Crypto Volatility Explained ' guide is well worth checking out to learn more about the dynamic nature of crypto markets.
The good news is that leading crypto exchanges allow you to take both long and short trades on margin. Whether it’s a long or short trade, the basic idea remains the same - the platform will lend you to take high-value trades for small capital. Moreover, we have partnered with some of the best exchanges to give our readers exclusive offers, such as the KuCoin referral code which unlocks a VIP bonus when you enter it into the registration form.
4. Isolated Margin Trading vs. Cross-Margin Trading
In margin trading, you can take multiple leverage positions. In isolated margin trading, the margin is assigned to a single position. In cross-margin, the margin is shared across multiple positions. For example, suppose you have $2k in your trading account and your exchange is providing 5x leverage. This means you can take a trade worth $10k by keeping $2k as a margin. Now assume you chose to buy $7k worth of BTC and $3k worth of ETH.
If you use isolated margins, there will be separate margins for each trade and one trade will not affect the other. So, the margin call on one position will not affect the other position. However, in the case of cross-margin, there will be a combined margin for both positions. As a result, the profit is one trade can be compensated against the loss of the other trade in the case of cross-margin.
Isolated margin trading is less complicated because each position stands on its own without getting affected by your other crypto positions. However, if you want to keep the number of trades small and easy to track, cross-margin trading can help you have a combined margin trading position. Artificial intelligence is now a popular tool to employ to assist you in taking care of your portfolio. Learn more about how to use AI in crypto trading and other subjects within our range of published articles.
5. Benefits and Risks of Crypto Margin Trading
Margin trading is a true double-edged sword. Trading crypto with leverage has great advantages when used properly. On the other hand, you can also incur heavy losses if you have lousy risk management. Let’s look at both the advantages and disadvantages of margin trading:
Advantages of crypto margin trading
- Using margin trading, you can amplify your gains multiple times.
- Margin trading helps in diversifying your crypto portfolio even when you have a small capital.
- Margin trading lowers entry barriers to crypto trading as investors can take significantly large positions with small capital.
Disadvantages of crypto margin trading
- Just like margin trading can amplify gains, it can amplify losses too when the market behaves in an unexpected way (and, this is pretty common!)
- Margin trading leads to high risk in crypto trading.
- High leverage crypto trading increases complexity of trades.
After you decide whether the benefits outweigh the risks, you will then need to decide which coins and or tokens you will buy. We provide readers guidance in how to choose the right cryptocurrency with expert tips within the articles we publish.
6. Top 3 Platforms for Crypto Margin Trading
There is a wide difference among crypto exchanges with respect to their margin trading features, fees, and leverage ratios. Considering the trading needs of beginners, we have come up with this list of the 3 best crypto leverage trading platforms:
- One of the most popular crypto exchanges with over 30 million users
- KuCoin margin trading features are unparalleled in the industry
- Extensive margin trading options including spot and futures trading
- Low-margin trading costs
- Through Bybit margin trading, you can enter both long and short trading positions
- Excellent spot margin trading options at a competitive cost
- BTSE margin trading offers one of the highest leverage ratios in the crypto industry
- Spot and future margin trading options
Some of the other reasons for using these best crypto margin trading platforms are their customer support, market reputation, low trading fees, and ease of use. After reading this margin trading crypto guide, you can learn more about the referral code for BTSE crypto exchange in our review.
7. Tips and Strategies for Profitable Crypto Margin Trading
Margin trading can help you win big if you follow the right strategies. Here are some of our tips and strategies to help you make the best out of leverage trades:
- Don’t just focus on the expected profits, calculate the expected losses as well.
- Use a strict stop loss to limit the maximum extent of your losses.
- No matter how strong is your conviction, never go all in on a leveraged trade.
- Hedge your leveraged trading positions through the right hedging strategies.
- Use diversification to protect your capital against adverse market moves.
- Don’t fuel the fire by through good money on a leading position. Exit once your stop loss is hit.
- Revenge trading on leverage is a sure-shot way to lose all your capital. So, have a great emotional balance while trading.
Our team of experts at JohnnyBitcoin would like to reiterate that all crypto trading comes with risks and gaining as much knowledge as possible is advisable. Remember to check out our homepage for more guides on the subject of cryptocurrency, exclusive crypto exchange referral codes and more!
8. Crypto Margin Trading Guide - FAQs
8.1 🤔What is crypto margin trading?
Crypto margin trading is a service offered by crypto exchanges to enable traders to enter big trades with a small capital. Under crypto margin trading, a trader can borrow capital from the exchange to place trades and amplify profits. So, margin trading allows users to buy crypto with leverage.
8.2 ⚖️Is crypto margin trading legal?
Crypto exchanges offer margin trading options to help traders take bigger trades with a small capital. Therefore, crypto leverage trading is absolutely legal. Crypto margin trading exchanges often operate under regulatory supervisions.
8.3 ❔What is the difference between crypto market trading and spot trading?
In crypto margin trading, one borrows additional funds from the exchange to enter into big trades. In crypto spot trading, we buy cryptos on an exchange at the current market price. Note that you can execute crypto spot trades with margin too.
8.4 🤑Is crypto margin trading profitable?
Crypto margin trading can be highly profitable if you follow the right risk management strategies. Profitability, however, is not guaranteed as crypto margin trading involves high risks as well. If the market moves in an adverse direction, you may end up incurring huge losses. So, a proper risk management plan is the key. This crypto margin trading guide gives a number of tips and strategies to lower crypto margin trading risks.