With several thousand different assets to work with and over $1 trillion in value, the crypto domain is one of the biggest and most lucrative financial markets. Millions of traders place orders and sell assets around the clock generating millions of dollars in profits. The number of overnight millionaires and even billionaires that appeared during this period is simply staggering. Today, we don’t have the same level of volatility or opportunities for explosive growth. However, more stability drew the attention of even bigger investors creating a financially healthy environment for conservative investors.
The arrival of hedge funds and large financial institutions to the party means that the market became less volatile. Strong trends occur regularly, but we do not have a situation where 90% of the value is wiped away within a month. Shifts are gradual. Many traders cannot make huge returns by using small amounts of money, they need more funds. Bitcoin margin trading is the solution.
What is margin trading crypto?
Margin refers to a payment made toward a broker as collateral for borrowing additional funds for investment activities. Having more funds at your disposal means that you can increase the number of assets you buy and earn more money with good deals. Margins are frequently employed by both professionals and novices to get access to bigger volumes. The former use it to increase earnings. The latter to compensate for the relatively small size of initial investments.
Paying to borrow is a concept conceived by brokers who tried to protect themselves from credit risks created by borrowers. To ensure that their credit risks are covered, brokers take margin and allow investors to continue buying whatever asset they like. If a position reaches a certain mark where it is unsustainable by a trader or can threaten the broker, it can be terminated according to the rules specified in the contract between borrowers and credit providers.
There are two sources of credit in trading:
- Banks and brokers act as providers of funds in stock or Forex markets. These services are paid with commissions, fees, and upfront payments from customers.
- Other users act as providers of liquidity or exchanges in the cryptocurrency world. Only a handful of exchanges offer leverage. Most of them are using funds from other users who, in turn, enjoy interest.
So, can you buy crypto on margin? Yes. Many exchanges have such options for those interested in using borrowed money. However, some companies are more liberal with how they work with borrowers. For example, Binance is an exchange that opens a separate margin account for any user who wants to take on credit. There are many perks of using this opportunity. On the other hand, some exchanges only allow approved users with verified P2P wallets to borrow from liquidity pools.
How to margin trade crypto
The process of margin trading crypto is quite simple and requires a trader to only open a margin account with one of the exchanges that have such services. Then, the procedure goes as follows:
- A trader specifies the number of assets they want to purchase.
- An exchange analyzes the request and determines whether funds can be procured.
- If the request can be fulfilled, the order takes place and assets are transferred to the account.
- When a position is shortened, the credit is issued in assets instead of money.
This is a general description of the process. Some exchanges do not require customers to specify how much of what they want to buy and simply limit the margin account to a credit limit that cannot be exceeded. However, the common rule is simple: you receive credit and must fulfill your obligations when necessary. While most credits do not have an expiration date, they can be taken away if your position goes south.
How to margin trade on Binance
Binance is the biggest international crypto exchange with over 600 different financial instruments available for investing, a separate NFT trading marketplace, over 17% market share, and millions of daily active users. The company operates in all corners of the world serving customers from Europe, Asia, and the Americas. It should be noted that many consider this corporation a European entity.
The exchange offers a wide range of various products including spot trading, futures, and, of course, margin trading. The latter is provided in a form of a separate account that must be opened beforehand and topped up with funds from your main account. Switching between these accounts is easy. Users who want to engage in Bitcoin or Ethereum margin trading must follow 4 steps:
Using the main account management panel in the app or on the website, a user creates a margin account and transfers assets to it. You can use any assets including BNB and USDT tokens that can be directly used to purchase other financial instruments.
- The “borrow” feature on the website is used to confirm the asset that you are planning to purchase. The menu is not complicated and guides you through the whole process comprehensively.
- Go to the Margin Trading page and purchase the financial instruments you are interested in. Note that you will be automatically limited to the amount that can be borrowed based on the amount of collateral.
- You can repay borrowed funds by going to the Margin Account management page and choosing “Repay”. You can use any freely available assets to do so.
This section of the exchange is quite interesting since it has a multitude of additional features designed to protect customers and the exchange from excessive risks.
An insurance fund is a pool of assets created by Binance to protect users in cases when accumulated equity (meaning your total assets minus total liabilities) reaches or goes below zero. The fund is also used to cover other potential issues. The fund is formed by both the exchange and participating users who stake their tokens on the platform.
Cooling-off is a special feature that blocks users from trading for a certain period after they place an order. This time is supposed to allow investors to rethink their strategy and avoid making uninformed, rushed decisions under pressure or due to emotional distress. While such features are nice to have, they are not an attraction, but a feature to protect the exchange itself.
All borrowed assets are subjected to insurance to ensure that the fund is used when it is necessary. Risks are reduced significantly, but you do not have any notable benefits other than not falling in debt to the exchange which is, again, not the biggest attraction.
Why is Binance margin trade popular?
When thinking about where to margin trade crypto, Binance is one of the first places that come to mind. The company is certainly the biggest player in the market. Yes, you can use other platforms and even Forex brokers that expanded in the crypto domain. However, Binance is a more reliable platform with a much bigger liquidity pool. Why is it so popular among many investors?
- Over 600 different pairs of assets which include staples like Bitcoin, Litecoin, Ethereum, and Monero. There are obscure coins, NFTs, and tokens of projects that are only gaining momentum. There are countless opportunities to make a profit.
- High liquidity is a very important aspect of margin trading. You need sufficient liquidity on the platform to place large leveraged orders. Binance has the biggest liquidity pool out there and offers users instant order execution.
- Low fees also increase the attractiveness of the company. Charges and fees can significantly affect your profits. This platform has low fees that are often cited as the lowest in the whole industry.
Can you margin trade on Binance US? You absolutely can. However, some limitations imposed by the US government may apply. Remember that Binance is an exchange that wants to cooperate with SEC. You will have to follow national laws and regulations. Now, when you know how to margin trade crypto, let’s talk about the issues that borrowing solves.
The increasing price of assets
In 2010, you could buy 100 BTC for $40. The entry barrier was so low that anyone could invest and start trading. Most exchanges used to be P2P platforms with relatively high fees. However, the explosive growth of bitcoin during the next decade created a situation where buying 100 BTC may cost from $2.4 million to $4 million depending on when you made a purchase.
The price of most cryptocurrencies is volatile and offers no periods of calm. While it is a good environment for active traders, the sheer value of these digital assets forced many to use leverage just to stay competitive. At the same time, you now have to invest more money to achieve higher profits, due to weaker price movements compared to what the market looked like in 2015.
With more institutionalized and independent professional traders entering the market, regular investors have no other choice but to use borrowed money. The problem started becoming apparent when many liquidity pools started lending their funds to newcomers who wanted to purchase assets but lacked the resources to place sufficient orders. Now, we have exchanges that provide margin trading services to customers.
Margin trading: popular exchanges
While Binance is an undoubted leader in the market, other companies offer credit to customers. Let’s take a closer look at several good platforms.
Kraken.
Kraken was founded in 2011. It is one of the biggest exchanges and was the first one to be featured on the Bloomberg terminal. The current evaluation of the exchange is $11 billion. It has millions of active daily users and offers several hundred different financial instruments to work with. Margin trading became widely popular with Kraken’s clients. The company has a very lucrative offer to those interested in borrowing funds.
Eligible clients can borrow up to $500 thousand and use a 5x leverage to increase their purchasing power. Larger leverage usually increases risks, so you should be careful when using credit that more than quadruples your portfolio.
eToro.
This company is an established Forex broker with a long history of expanding in different domains. Their foray into the crypto industry was expected. The company operates with lots of different derivatives and offers a large number of ways to speculate on the prices of a large variety of tokens. However, you won’t be able to purchase actual assets. There is no spot market here.
You use leverage to improve your positions on the futures market or when trading other derivatives. eToro has been a reliable broker for millions of users from all across the globe and continues to be a great provider of financial services.
BitMex.
Another exchange that focuses on derivatives and other financial instruments that are adjacent to the crypto industry. You can use huge leverage (up to x100) which is quite dangerous for newcomers who do not fully understand the risks associated with using borrowed funds. Such large leverages can dramatically increase both profits and losses. You should be very careful when engaging in such risky margin trading.
On the other hand, BitMex is a great choice for risky traders who want to use strategies that will make them rich overnight. While we do not recommend using leveraged positions that may leave you without a dime in an hour, you make your own decisions.
Poloniex.
If you are not interested in unnecessary procedures like verification and cooling-off, you will be more than happy to work with Poloniex, an offshore trading platform that works with both derivatives and actual assets. The leverage can be as high as x100. Again, we do not recommend using such high leverages to avoid risks. Even well-placed stop loss orders will leave you without a significant portion of your portfolio if you make a wrong call.
Interest rates for lending are quite high, calculate the price of credit before opening a margin account. Note that the exchange was hacked in 2014 and over 12% of all assets were stolen by an anonymous group of criminals. While it is unlikely that such issues will repeat, you should never ignore potential security problems.
Big leverage vs small leverage
When an exchange offers x100 or x125 leverage, chances are that you are dealing with a broker who offers a wide range of derivatives, but won’t allow you to buy actual assets. Remember that margin trading is also about safety for brokers. They won’t allow you to open risky positions on the real market where assets are traded. Derivatives are a different story.
Using large leverages often means risking much higher losses. It is possible to completely lose control over your portfolio after a couple of bad decisions. There should be a distinct balance between risk and reward. The size of your leverage often defines this balance.
Bitcoin or Ethereum margin trading In the US
Note that only 23 states in the country allow margin trading. Only some companies are allowed to operate within these states and offer up to x3 leverage. Legal limitations forced many exchanges to completely leave New Jersey, West Virginia, South Carolina, Illinois, and several other states. It is also important to remember that margin trading profits can be tax deductible. It depends on local tax laws.
Cryptocurrencies are not exactly popular with many American lawmakers meaning that regulations are still tight and opportunities for American citizens are limited.
In Europe, you may be subjected to completely different rules. However, most European countries have a relaxed stance on the cryptocurrency issue. Many countries have official vendors, custodian service providers, and other adjacent service operators registered locally. For example, Latvia, Lithuania, and Norway have local crypto companies.
Some tips for margin trading
If you are inexperienced in financial markets, it is a good idea to abstain from using leverage at all. You should use borrowed funds only when there is a high chance of making a profit. Identifying opportune moments is a skill that must be acquired by trading and learning technical and fundamental analysis.
Use only small leverages while learning. Some traders make the mistake of overborrowing when they do not fully understand the risks associated with having less equity than necessary to cover a failing position. Smaller leverages allow you to better control risks.
Never forget about volatility. Leveraged positions in most markets are used to solidify gains. They are rarely used by traditionally trained investors to earn money. Instead, they are used as tools to fortify an already existing position within a very strong trend. Cryptocurrencies are highly volatile and present many risks for any long-term position.
Employ smart money management. The idea behind margin trading is that you can increase the strength of any market position. It means that you can dedicate a small portion of your overall portfolio to your margin account while continuing to engage with other financial instruments without any leverage. It is a good idea to move 20% of your portfolio to a margin account. This way, you will be ready for a margin call and have a good understanding of your limits.
Final thoughts
Margin trading is a great instrument for experienced investors who want to enter the cryptocurrency market, but either lacks sufficient funding or want to diversify risks by using leverage on some positions. For beginners, it is often a trap that leads to a downfall. It is never a good idea to use borrowed funds to trade, especially when it comes to x100 or x200 leverages that can be detrimental to your portfolio. However, you should also remember that leveraged positions can help you make bigger profits without significant initial investments.