Bitcoin Margin Trading
What Is Margin Trading And How Exactly Does Trading With Leverage Work?
Leverage makes it possible to use little money and still trade with a lot of money – one of the biggest advantages when trading Forex or CFDs at traditional brokers, or when trading cryptos with leverage. While margin trading is standard at Forex brokers, offering leverage is not yet that established in the field of crypto trading.
One of the reasons for that could be that crypto has been traded mostly by trading newbies and a lot of youngsters in the past or at the beginning of crypto trading in general. So the inexperienced guys were protected from the losses that are possible in margin trading – above all in case a trader doesn’t really know what he’s doing.
On this page you find the best brokers to trade Bitcoin on margin:
The lever is usually expressed as ratio. If you have 5:1 leverage, that means you can hold a position of 5000 USD with only 1000 USD of own trading capital. (Your own trading capital is the so-called margin). The rest comes in the form of a loan from your broker. Since their commission is calculated according to the larger position, this is a win-win situation for everyone.
Brokers benefit from offering margin trading since this means way higher fees for them. Just imagine, the world’s largest Bitcoin margin trading Broker BitMEX is located in the world’s most expensive office (in Hong Kong) which they can afford due to their enormous fee turnover.
Why Would You Use Leverage Instead Of Investing Your Own Money?
One of the reasons why professional traders use leverage is that it allows them to trade higher amounts with less equity. So they can put more money in a trade than they own in order to achieve higher gains.
But what if you have a lot of money? Why shouldn’t you just invest it all, without leverage, instead of taking just a bit of what you have and “borrowing” the rest from a broker?
For a good reason: If you have a lot of Bitcoin – let’s say several dozens or even hundrets of BTC – then you might not want to send them all to a broker platform. Don’t forget that in the moment you send your BTC to a broker, you don’t have the power over them anymore.
In the event that something should happen to the broker, your capital could be gone, in a worst case scenario. So traders with lots of capital can leave the majority of their BTC securely at home and still trade with big positions by using high leverage.
There Are 4 Advantages Regarding Margin Trading:
- You don’t have to put your money in just one or two products. Some investors are totally into leverage because they can invest in many different financial products and get the most out of their capital.
- You can increase your potential winnings. Let’s say you’re investing 1,000 USD in Bitcoin because you think price will rise from that point. Then BTC actually rises by around 5 %. Your 1000 USD will also increase by 5%, i.e. by 50 USD. But if you had traded with a leverage of x10, your trade would have been worth 10,000 USD instead of 1000 USD. Instead of 50 USD you would have earned 10x as much, namely 500 USD!
- If you own a lot of Bitcoin and want to benefit from big price swings/protect the value of your BTC capital in bear markets by shorting with a corresponding quantity, then you can leave most of your coins “at home” and trade with the same position size, but through leverage.
- With leverage you can already earn more money with small course changes. So small intra day trades (scalp trades) can already become quite profitable.
In Forex, for instance, the exchange rates rise and fall every day, but usually only by a few cents. That’s why Forex traders are so leveraged, because you can make a lot of money on even the smallest changes in the exchange rates of two countries.
Since Bitcoin is way more volatile than Forex you can even earn way more money by trading BTC on margin.
|Without leverage:||1000 USD||1000 USD||50 USD|
|With leverage x10:||1000 USD||10,000 USD||500 USD|
The Dark Side Of Bitcoin Trading With Leverage:
Leverage can not only increase your profits, but also your losses.
To return to our Bitcoin trading example:
If you had been wrong with your assessment and the cryptocurrency had fallen 5%, you would have lost 50 USD. But if you had traded with a lever of 10:1, you would have got rid of 500 USD which would mean a 50% loss of your trading capital (the 1000 USD) which is a lot. Therefore, too high leverage can be extremely risky.
The highest leverage for Bitcoin trading is offered by BitMEX – which is generally one of the largest Bitcoin brokers and even the No.1 broker for trading BTC on margin. BitMEX offers leverage up to 100x! That means that if you don’t know what you are doing, you can lose a lot of money in no time. So better start small and trade yourself up carefully.
How To Trade Safely With Leverage
Trading knowledge and experience is everything when it comes to secure margin trading. This means that it is definitely possible to margin trade profitably in the long run. Skilled Bitcoin traders know exactly how to make sure that their profits will always exceed their losses significantly long-term.
With BitMEX you can never lose more than your stake. So if you trade Bitcoin with 1000 USD with a leverage of x5, it’s as if you had invested 5000 USD. However, you can lose a maximum of 1000 USD, because your trade will automatically close if it falls below your bet. That’s what you must be aware of.
So you should make sure that this stake will never be more than you can afford to lose. But you can also be sure that you will never owe the broker more money than you had on their platform if you’ve made a losing trade.
But that’s only the most basic point to know. Actually, professional traders trade quite safely on BitMEX, since they know the right trading principles and techniques that ensure small losses compared to higher gains in the long run.
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