Trading on margin allows you to leverage the funds in your account to borrow more funds and increase your buying power. In other words, it means you borrow money to trade with more than what you have. Some people swear by it and think it’s a great trading feature to use. Others say you should stay away from it because it’s just too risky. But which is it? Should you give it a try or should you be afraid of it? In this article I’ll explain how margin trading works and reasons why you may want to give it a try.
But first things first. How does margin trading actually work? Imagine you open a position with $25 and leverage 4:1, or 4x. That means you are borrowing $75 to buy $100 worth of an asset and only putting down your $25. The obvious benefit to doing that is increasing your possibility of gain. You can make a lot more money by investing $100 than by only $25. But make no mistake, there is no free lunch.
When you trade on margin, you increase the odds of having a higher reward by taking on extra risk. Because you are borrowing money, you owe it back along with any applicable fees, no matter what. To make sure they receive the loaned amount back, exchanges will usually liquidate your margin trade once it hits a price where you would start losing the borrowed funds. But depending on which exchange you are using, if your trade goes south you may end up actually losing the owed funds and then some. But if it’s that risky, why would you ever do margin trading? Here are a few reasons:
You think the odds are in your favor
You are sure the price of an asset is going up, or down, and you want to speculate on it. In that case, trading on margin is a great way to maximize your gains no matter if you're going long or short. Having the possibility of leveraging your capital 2, 10 or sometimes even 100 times is an obvious way to make more money from a trade. You can leverage short or long. When you short you bet on the price going down (and if it goes up you lose money on paper). When you go long, you bet on the price going up (and if it goes down you lose money on paper).
You don’t want your assets on an exchange
If you are a proponent of the expression “not your keys, not your coin,” you may want to keep your assets away from exchanges. If that’s the case, you can use margin trading as a way to keep less cryptocurrency on an exchange at a time. In that situation, you would keep the bulk of your funds in “cold storage” (an offline wallet) and have only enough on the exchange to trade while using leveraged buys (buying on margin). This is definitely not as risky as simply speculating with leveraged positions, but it does carry the same general risks. Short-term price movements may end up forcing you to close a position and lose money.
You want to hedge a position
When you open a position, you have to choose whether you are going long (when you think the price of that asset will go up) or short (when you think it will go down). There is always the risk that you are wrong, and the opposite of what you think actually happens. To hedge against that risk, you can always trade on margin. Let’s look at an example. Remember November 2018, when the price of Bitcoin dropped 45% in 10 days? That was a nightmare for holders. To protect yourself against massive losses, you could have opened a short position on Bitcoin, using very little funds and margin to protect yourself against the even bigger losses.
You suffer from FOMO
FOMO, or the Fear of Missing Out on a big opportunity, is a common issue amongst crypto traders. Because crypto markets can fluctuate so much, someone else can always be making more money than you. Especially in crypto, FOMO can affect all kinds of traders, from least to most experienced. FOMO is a particularly bad reason to start using leverage. Remember that emotions can affect your consistency in trading, which is one of the most important characteristics of successful traders. Understanding and learning how to manage the risks of margin trading is essential if you want to achieve good results.
The Risks of Margin Trading
Don’t get distracted by the possibility of gains. It’s important to remember margin trading comes with associated risks and even more important to learn how to manage them. Crypto markets add another layer of risk because of their sometimes violent swings in both positive and negative directions. Therefore, it would be best to never trade with more than you can afford to lose and always take profits. The first thing to keep in mind is that the higher the leverage you use means you have a lower margin of error to reach your liquidation point. Even a 1% difference in price could be all you need to be liquidated and suffer a massive loss. Thankfully, there are risk-management strategies you can use to help minimize your risk when using leverage. The one you should definitely be using is stop-loss, a risk-management tool that closes your trade at a specific amount if the market moves in an unfavorable direction. Another approach is to start trading with smaller amounts to keep your risk low and not lose all your funds in one trade. Using lower leverage is another strategy that allows you to retain more funds and open more trades. Some trading platforms even offer a risk-management strategy called negative balance protection. This strategy is ideal because it stops you from losing more funds than what you have in your account.
Top Exchanges for Margin Trading
is currently the largest cryptocurrency exchange in the world in terms of daily trading volume of cryptocurrencies. It has a daily trading volume of 1.2 Billion and 1.4 Million transactions per second. Margin trading on BINANCE offers a lot of options, including cross and isolated margin trading. These can be complicated for beginners, but that doesn’t mean the platform is hard to use. You open a position with your capital and the amount of asset you want to purchase. The exchange automatically lends you the funds required to open that position based on maximum applicable leverage. While closing a position, Binance also automatically deducts the borrowed amount and associated fees. Binance offers maximum leverage of 3x for regular accounts, and 5x for master accounts of cross-margin trading. Isolated margin trading can be done with up to 10x leverage.
is a derivatives exchange platform that offers to margin long or short positions for Bitcoin, Ethereum, EOS and XRP trading pairs with up to 100x leverage. The exchange offers perpetual contracts that follow the cryptocurrency price. Bybit has also released USDT-settled perpetual contracts that can be traded on the exchange with high leverage. Bybit is a platform geared towards more experienced crypto traders that are looking for an exchange with more advanced features.
is powered by a set of smart contracts built on Ethereum and allows you to trade over 700 stocks, commodities, currencies, and other crypto. You can go long or short any market with up to 10x leverage, perfect liquidity and no commissions. The platform is unique because the counterparty to all trades is not another user but a smart contract. With all Morpher trades, you can never lose more than what you invest. The margin interest (a daily, non-compounding fee of 0.015% net exposure multiplied by the leverage selected) is deducted from the value of your position. This is beneficial in two ways: you don’t need to maintain any balance to cover the margin interest (because you already provided it when you opened the position) and if your position liquidates there are no fees left to pay. Morpher has over 50,000 active users every month and executes thousands of trades per day.
To Leverage or Not to Leverage?
Most articles you find online will tell you to avoid margin trading altogether because it’s too risky and too stressful, but that is not necessarily true. As we have seen, using leverage can also be a great way to manage risks and reduce your losses. Like anything else, margin trading has its pros and cons. It’s up to you to decide whether it’s a relevant trading feature for you or not. However, if you want to become a more active trader and increase your short-term gains, using leverage is probably something you can’t ignore. It may very well become an essential tool for you, especially when it comes to managing risk. So if you want to try it out without risking your own funds, you can create an account on . You receive 100 free tokens when you create a new account. You can use that to experiment with leverage and then decide whether or not you want to keep doing it. That allows you to learn how to trade on margin without having to risk your own funds.
