A term that we are seeing more and more often certainly now is that Binance will also be offering the function, is margin trading. It is a way to make money faster by trading in cryptocurrencies. But what exactly is margin trading? We explain it to you with the Kurs IOTA trading methods
What is margin trading?
You can, of course, buy and sell cryptocurrencies in the normal way. You buy digital currency on an exchange for a certain amount, and when you want to sell it you do the same but then the other way around. Everyone knows this, but margin trading is a function that is mainly used for experienced traders and also entails risks. This is because it is possible to trade cryptocurrency with borrowed money, to use leverage or to take certain positions that you cannot achieve simply with buying and selling.
Margin trading is actually an advanced way of buying and selling cryptocurrencies with money borrowed by the exchange and other traders who lend cryptocurrencies, where you open a position when you buy and close a position when you sell. Your position can be a so-called long position where you buy a specific currency and bet on a rise in the currency in question. You actually buy something you don’t have. However, your position can also be short when you bet on a fall in price. Then you are currently selling something that you do not have since you think the price is going down.
To be able to open both positions and therefore to start with margin trading, you must have a margin. You must have money in your account to be able to borrow cryptocurrency. Suppose the rate does not do what you expect, then you have to pay the exchange money. So there must be enough money in your account to cover this debt. If the position you have opened is at a considerable loss, the exchange will automatically close this position to prevent the loss from exceeding the amount of collateral margin that you have in your account. Each exchange has its own rules regarding the number of cryptocurrencies to be borrowed, the minimum collateral margin and the costs of taking out a loan.
Example ‘long’ position
If you believe that a cryptocurrency might well rise and you want to make a big profit on it, you can open a long position. For example, you can choose to put 10,000 dollars in your account and take a long position on a digital currency that has a current value of 10,000 dollars, for example, BTC or EUR. You choose a leverage of 5, which means that the exchange will buy 5 BTC worth 50,000 for you. You have now opened your position and therefore owe the exchange money. If the BTC rate rises to 15,000 dollars each, then your position is worth five times 15,000 dollars at that time. If you close your position now, the exchange will receive the 50,000 dollars stake and you will receive the 25,000 dollars profit.
However, the opposite applies when the price falls. If BTC is suddenly worth 9,000 dollars and you decide to close your position, then the exchange at 45,000 dollars is not enough. So you have to add 5,000 dollars from your own account. So you lose 5,000 dollars. You cannot borrow indefinitely because the exchange looks at the money in your account to see how much can be borrowed without creating debts towards the exchange.