Get direct access to the best margin brokers in 2022.
In our crypto margin broker comparison, you will find all the important information about security, licensing and trading!
What is Margin Trading?
Trading cryptocurrencies is generally gaining in popularity. Margin trading is particularly popular. With this approach, investors do not trade real assets, but contracts on cryptocurrencies such as Bitcoin.
Contracts for Difference (CFDs), which investors can also purchase from crypto brokers, are particularly well-known. But there are other derivatives in practice.
What is important in margin trading, however, is the fact that traders use leverage for trading and use margin as collateral for this. Margin trading is particularly popular in markets with low volatility, such as forex markets. Nevertheless, margin trading is also becoming increasingly popular for cryptocurrencies or shares.
How does margin trading work with cryptocurrencies?
As soon as a trader initiates a margin trade, he must commit a defined proportion of the trade as collateral. We are talking about the so-called margin.
As soon as an investor decides to use leverage in a trade, he must use borrowed capital. However, this outside capital is not procured privately, but is provided by other market participants.
The market participants provide the capital via the corresponding platform in a margin fund. Such a margin fund is a fund that pools the investors’ capital and makes it available to the market.
In return for the risk provided, the capital providers receive an interest on the capital provided – this interest depends on the current market demand.
Such a margin fund is interesting from the perspective of the capital providers in order to achieve an additional return. But some exchanges are also starting to set up their own margin funds to ensure sufficient liquidity for users.
This is how the margin is calculated in crypto trading
If you want to carry out a margin trade, you must also decide on a leverage. This leverage describes the ratio of debt to equity. If you have a leverage of 2:1 and a trade with a volume of 5,000 US dollars, you must deposit 2,500 US dollars as margin.
With increasing leverage, your own margin also decreases. If you leverage the aforementioned 5,000 US dollars with 50:1, for example, then you only need 200 US dollars as margin.
Please note with crypto trading that each platform has its own rules and sets its own leverage rates. While you can trade at a ratio of 2:1 on a normal crypto exchange, for example, this looks completely different for futures contracts. With a futures contract, you will often find a leverage ratio of 15:1. With margin brokers, you will usually find leverage ratios of up to 125:1.
What are the advantages of Bitcoin margin trading?
Of course, you can trade many cryptocurrencies with a margin. However, you should understand such a trade for what it is – a trade. You don’t want to be invested for the long term, but you want to profit from the leverage effect.
The good thing about margin trading is that you don’t invest in individual cryptocurrencies, but map a trend. In this way, you can trade entire markets short or long, for example. A short is a position on falling prices, while a long is a position on rising prices.
And this is where leverage becomes really interesting, because if you use leverage, then your position changes in relation to the market trend in relation to the leverage you use. So if you have taken a margin trade at a ratio of 10:1, then a 1% percentage change in the market is equivalent to a 10% relative change in your trading position.
The obvious advantage of this approach is that such a margin trade can lead to higher profits. Also, as a trader, margin trades allow you to aim for broader diversification. You only need to invest smaller amounts, relatively speaking, to open a trading position. Consequently, you do not have to wait several days until the money is available in your clearing account before you can invest it in the market.
Advantages of Margin Trading
- Better diversification
- Faster trades
- Low investment capital required
- Higher profits possible
Disadvantages of Margin Trading
However, in addition to the advantages, there are also some disadvantages that investors should take a closer look at when margin trading with cryptocurrencies. Obviously, margin trading does not always lead to profits.
So, if you have chosen a trade with a leverage of 10:1, as described above, a 1% loss on the crypto market can lead to a 10% loss in your portfolio. Thus, a loss of 10% on the market – and such volatility is nothing special with cryptocurrencies – would be a total loss of your actual trading position.
In contrast to spot trading, there is even the possibility that your losses will be greater than the investment. In these cases, you have to make up the shortfall. For this reason, if you as an investor focus on margin trading with high leverage, you should apply appropriate risk management strategies.
For example, use stop limit orders to limit your losses. In addition, always have money on hand in order to be able to act flexibly. As a general rule, you should not overestimate realised losses. At the end of the day, your realised gains should be greater than your losses – this is how you increase your assets.
- High risk of loss
- Trading only makes sense with risk management
- Instruments for loss reduction cost extra
Best margin trading platforms
The margin trading platforms we compared were all convincing – none of the offers can be described as bad. Nevertheless, we found a clear favourite in Bybit. In the following, we will briefly go into a small selection of the margin platforms we tested.
Bybit convinces with excellent risk management and security
Bybit is a comparatively new crypto exchange and focuses exclusively on margin trading. At Bybit, you can trade different cryptocurrencies such as Bitcoin, Ethereum, Ripple or EOS.
The team behind Bybit is particularly noteworthy. True industry experts act at Bybit – there are former Morgan Stanley employees in risk management. However, the developers do not only pay attention to good risk management, but also to security. A hierarchical deterministic cold wallet system secures the users’ deposits.
What we particularly liked about trading were the numerous instruments. There were USDT Perpetual, Inverse Perpetual and Inverse Futures. In addition, newcomers receive a bonus of 10 % on the trading fees.
The operation of the platform is also very good. Whether via a browser or via the Bybit app, we found the trading to be logically and comprehensibly structured.
FTX – the platform for professional traders
The second platform that really deserves a positive mention is FTX. Although FTX was only founded in 2019, it is hard to imagine trading without FTX, especially in the area of margin trading. As an investor, you can trade futures and options at FTX. The trading fees range between 0.04 and 0.07%.
With a maximum leverage of 101:1, you can take significant risks with FTX. However, there are some providers that support even higher leverage. We found the variety of tradable cryptocurrencies particularly positive. In addition to the usual suspects, you can also trade numerous altcoins such as BNB, XTZ, TRON, BCH and many more.
When trading, investors can fall back on futures and options. The functions here are also convincing. In particular, the trading interface is one of the great advantages in our view. However, newcomers can quickly feel overwhelmed – the platform is clearly aimed at a professional audience.
One of the reasons why FTX is considered a particularly promising and trustworthy platform is the involvement of Binance. Binance is considered one of FTX’s largest investors.
How can you successfully start Bitcoin Margin Trading?
As we have pointed out several times in the previous chapters, leveraged trading of cryptocurrencies is very risky. Within a few seconds, you can lose your entire capital. Compared to spot trading, which is also very volatile, you take a high risk.
With the following tips, we would like to give newcomers some rules that should be observed when margin trading.
Financial security comes first
You are new to margin trading and have made your first profits? This experience is electrifying. However, when investing you should keep in mind a fundamental rule coined by the stock market titan Warren Buffett.
Rule number 1: Never lose your money.
Rule number 2: Never forget rule number 1.
Warren Buffett, CEO Berkshire Hathaway
You should never lose money! You may take risks, but there should always be a positive risk-reward ratio. Especially beginners tend to overestimate themselves after the first positive experiences.
Do not make this mistake and always make sure you are well hedged.
Manage risk and avoid liquidation
Liquidating your trading position is the financial worst case! Make sure you never want to be liquidated, otherwise your deposits are lost.
The best way to avoid liquidation is through intelligent risk management. A stop can protect your assets and save you from liquidation.
Learn technical analysis
Margin trading is an active trading approach. Consequently, you should know active variants that allow you to evaluate the trade.
Learn the technical analysis of cryptocurrencies. Keep an eye on support and resistance levels. Promising, technical chart formations are a reason to build up your own position.
This tip may seem banal at first glance, but in practice, unfortunately, investors repeatedly fail to take profits. The reason is the hope that prices will continue to rise – the greed for more returns.
As soon as you make profits, you may sell at least part of your position. Being lucky is something great, but you should not rely on luck in your finances. Always sell part of your position and earn your stake, then you have no risk in the further course.
Build up trading positions over a longer period of time
Beginners in particular should not use too much leverage. Instead, trade for long periods of time. Build a long or short position. This way you can react to market trends.
Just think a little longer term and build your trading position based on that thinking. Also, react to short-term fluctuations in the market and improve your trading position.
Conclusion: Use the right margin platform
You now know what is hidden behind the term margin trading for cryptocurrencies. Please note that crypto trading involves a high level of risk, but at the same time you also have the chance of high returns.
It is important that you choose the right margin platform. In our margin trading comparison, we have compiled the best options for margin trading cryptocurrencies.
If you are still a beginner, you can learn how to trade with one of the established CFD brokers. Crypto brokers in particular offer free demo accounts here. Take the chance and learn how to trade before you lose money and break the most important rule – “Never lose money.”