What is Margin Trading in Crypto?

A growing cryptocurrency industry has been accompanied by the development of a derivatives market based on crypto, one that enables retail traders, as well as institutional entities, go long or short on crypto coins without having to hold the underlying instruments.

The risks associated with custody and storage are not encouraging people to hold crypto, but instead, with plenty of different cryptocurrency-related instruments now available with major brokerage houses, trading cryptocurrency contracts for difference is an increasingly popular activity, given the sustained elevated market volatility.

Margin trading crypto has several advantages. But at the same time, it would be important to talk about some of the risks associated with it, given that volatility combined with irresponsible use of leverage is not the right combination for retail traders wanting to achieve consistency.

Cryptocurrency trading on the rise

By using a cryptocurrency trading platform any trader has the ability to trade on Bitcoin, Ether, XRP, or other popular altcoins, most often than not, via CFDs, and take advantage of price movements in the short-term. Cryptocurrency trading is a popular activity because of the volatility, and traders need their target assets to have a strong directional bias.

Recently, Bitcoin came close to $18,000 and Ethereum managed to continue its recovery from the September lows, communicating the market still had growth potential, even after a very impulsive ride since March 2020.

Based on the data released by brokerage houses, cryptocurrency trading on Bitcoin, and other supported cryptocurrencies increases each time valuations are extremely active. However, margin trading on crypto needs to be discussed more thoroughly, due to its positive and negative implications.

Increasing market exposure with leverage

Margin trading or the use of leverage means that, as a trader, you have the ability to trade a volume larger than its account size. You need to deposit a certain amount as collateral and the broker will lend the rest of the required liquidity. Increasing market exposure is a “double-edged sword” because it could lead to higher profits, but also, to higher losses, if the market does not perform as expected.

Cryptocurrency trading is generally done in the short-term, so traders are taking advantage of price movements that occur in less than a day. With margin trading, market moves are aggravating account balance swings, and it would be critical for traders to abide by several key rules.

Keeping track of the risks associated

Based on a recent Kraken report, a continued rise of Bitcoin and volatility spike in November is very likely, which means cryptocurrency trading activity will intensify. Using margin trading in such an environment will need to be done according to risk management principles, to prevent large account drawdowns.

Professional crypto traders are constantly thinking about risk first and only then about rewards, which is why all beginners should start developing the same mindset. Cryptocurrencies will continue to be active financial instruments and that will only mean plenty of new trading opportunities across all altcoins, not just with Bitcoin.