All You Need To Know About Crypto-based Margin Trading
There is always strength in numbers, approximately the word goes. Its veracity remains undisputed (partially debatable) when put on any part of life, be it politics, history, or finance. Today, in an increasingly digital world, the adage is finding application within the realm of cryptocurrency exchanges.
A cryptocurrency exchange is certainly not but a platform that facilitates the purchase and sale of digital currencies. According to CoinMarketCap, exchanges play a really crucial role in popularizing and developing cryptocurrencies. This really is evinced by a massive $322 billion capitalization this market boasts and it is further supplemented with 24-hour trading volumes touching $67.3 billion.
Cryptocurrency exchange software programs are continuously being updated to improve engagement and entice more users. One method involves introducing new trading options. Presently, models for example market orders, limit orders, and prevent orders are prominent. They match buyers with sellers faster and help users set predefined parameters for executing transactions. However, the recognition of those options pales out in comparison to some relatively new model – Margin Trading.
Understanding The Term
To state simply, margin trading refers to a scenario where an individual places orders using funds borrowed from a broker. Usually, there's a limit towards the credit line extended, and the borrower has to repay the borrowed funds along with interest within a stipulated time period.
How Do you use it?
Margin trading enables visitors to place larger orders and potentially earn an income in case the invested cryptocurrency performs well. The borrowed funds help the individual within this pursuit.
Let us take a look at an example. Alice is really a crypto trader and it has $5000 in her own account. Based on market trend, she believes the Bitcoin that is currently costing $2500 will increase in value over the next day or two. She will only purchase 2 BTC together with her funds, but Alice wants to invest more. Hence, she approaches Bob, a broker. He agrees to lend her an additional $10,000 and expects $1000 as interest. Using these borrowed funds, Alice places a purchase for six BTC. Within the next 4 days, the price of each Bitcoin rises to $5000! Thus, the need for Alice's investment portfolio is continuing to grow to $30000. After she repays Bob $11000, she's playing $19000, of which $14000 is her profit. Thus, by utilizing margin trading and her vast market expertise, Alice could reap substantial rewards.
What Would be the Downsides?
However, margin trading is not everyone's bag. It ought to be noted that irrespective of a profit or loss, the borrower needs to return the funds to the lender along with interest. Paying homage to the above example, make a scenario in which the Bitcoin's value drops to $1250. She'd still be liable to repay Bob's $11000. This would leave her with an overall total lack of -$6000.
Thus, experts advise that only investors with substantial market acumen should participate in margin trading. This advice is much more significant when viewed in the outlook during a cryptocurrency investor. With constant price fluctuations with no proper regulation in position, it is very easy for greenhorns to get rid of money and enter debt traps.
In light of countless incidents, many exchanges are taking steps to address this issue head-on. They've included disclaimers as well as happy to educate new users against the potential harms.
With the marketplace capitalization of cryptocurrencies predicted to hit $1 trillion, things are looking upbeat. This makes margin trading a go-to option for many traders. Moreover, as more and more details about cryptocurrencies is pouring in, the time come to master this craft is significantly reducing. Finally, platforms are introducing strict limitations and are developing simulation games to teach new users about cryptocurrency exchanges.