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Doing margin trading is fundamentally riskier than regular trading, but when it involves cryptocurrencies, the risks are even higher due to the volatility. While hedging and risk management strategies will be helpful, margin trading is not for beginner traders. Even doing chart analysis or identifying trends, won't take away the risks with margin trading, but being more aware of the market does lower your risk.

So before doing any leveraging, traders are suggested to first develop an understanding of technical analysis and to acquire an extensive spot trading experience. The biggest player in margin trading is Bitcoin, below we will explain how margin trading is used with BTC.

Bitcoin margin trading, allows a trader to have an open position with leverage (leverage enables a trader to have a bigger exposure in the crypto market).

For example, if you have an open  Bitcoin margin position with 10X leverage and the price of Bitcoin goes up by 30%, then the margin position would yield a 300% profit. Similarly, if the price of Bitcoin goes down by 30% then the leveraged position would yield a 300% loss.

Now you are probably wondering how margin trading works for the crypto market. First, let’s talk about how the exchanges play a part in margin trading. In a sense, the exchange will provide loans to the traders so they can increase their initial capital. This enables the trader to open positions with greater leverage. The exchange usually doesn’t have much risk since every position has its liquidation value, which is based on the selected leverage.

Next, let's move on to the fees and risk associated with margin trading. The cost of opening a margin position includes paying the interest for the lent coins and also incurring fees from the exchange. Keep in mind, as the chances of profit increase, risk will increase as well.

The most a trader can lose from their position in margin trading is the amount that was invested in the initial position. This is known as the liquidation price. The liquidation price is when the exchange automatically closes the position, so the trader does not lose the money that the exchange had lent. The following scenario would be an example of this. If Bitcoin is valued at $10,000, and we bought one Bitcoin at a long position with a leverage of 4:1, then the cost of our position is $10,000. Besides the initial cost, we have also borrowed a further $40,000 from the exchange due to the leverage.

Now let's talk a little about the risk of using a high leverage trading strategy. The general rule here is, the higher the leverage the easier it gets to reach liquidation. In order to calculate this risk, you divide the leverage lever by 100 to get the percentage move that would cause liquidation. For example, a trade with 1:50 leverage needs only a 2% move (100 divided by 50) to get liquidated. A 2% move can happen quickly in the volatile crypto markets, displaying the risk involved.

The more leverage used, the greater the returns can be for traders. However, the losses can be larger as well. Leveraging your investment essentially makes the return more volatile, and if you can’t stomach the risk, you might want to stay away from margin trades.


Our native desktop app, HyperTrader, currently support margin trading on BitMEX. We are adding more exchanges with margin trading in our 2.0.

Download it today and give it a try. Charting on exchanges is 100% free.