For traders with a limited amount of Bitcoins, there is the option of margin trading to add leverage to the investment. In fact, it helps in increasing the amount that is invested without having to hold the assets. It’s imperative to mention that margin trading is not recommended for everyone since it has a very high risk.
What Is Bitcoin Margin Trading?
Margin trading is what allows traders to open a position with leverage. For instance, there’s a margin position with 2x leverage. The base assets had enhanced by 10%. The position yielded 20% owing to the 2x leverage. Standard trades are done with the leverage of 1:1.
What makes bitcoin margin trading possible is the existence of the lending market, where lenders provide loans to the traders so that they can invest in larger amounts of bitcoins (Dummies’ guide to bitcoin to help you invest better). This way, lenders benefit from the interest on the loans. In some exchanges, users provide loans for the margin markets, and in others the exchange itself offers them.
The Costs & Risks Involved In Bitcoin Margin Trading
As mentioned previously, the cost of the margin position incorporates paying the interest for the borrowed bitcoins (even if to the exchange or another user), and fees to open a position with the exchange. Since the chance to earn more goes up, so does the risk to lose more. The most one can lose the amount that he has invested to open the position. This level is known as the liquidation value. This term, liquidation value, is the value where the exchange would close the position automatically, so that the individual won’t lose any of the loaned money, and just lose his own money.
Some Essential Bitcoin Margin Trading Tips
Though there are a lot, but a few which you should never forget include –
Risk Management – When it comes to trading on bitcoin margin, it’s important that there are clear regulations of the risk management, provided you are beware of excessive greed. Take the amount into the account that you wish to risk, bearing in mind that it can be lost completely. Set clear levels to close positions. Take profit or a stop loss.
Close Watch – Bitcoins are considered the assets with excessive volatility. Margin trading of bitcoin doubles the risk. Therefore, you need to try to make short-term trading positions which are leveraged. Furthermore, the daily fees or margin position is nominal. The fees can amount to a significant number in the long run.
Extreme Movements – Bitcoin trading, at times, has extreme fluctuations which take place in both the directions deeply. The risk, in this case, is that the deep will touch the liquidation value. It could even happen where the leverage is relatively high so that the liquidation value is relatively close. Also, you can benefit from these deeps and try to set closing target positions, in the hope of that the deep will run over them, leave you with a decent amount of profit and then return to the previous price. Additional tips for bitcoin trading are hidden in Bitcoin Faucets.