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What is Bitcoin Margin Trading – Beginners Guide

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Introduction

Because of the regular increase in the price of Bitcoin and even more importantly, the ease of acquiring Bitcoins, more people are interested in trading this attractive digital currency. The price of Bitcoin changes quite regularly, it fluctuates by small margins several times a day. Now, unlike the stock market trading where owners of stocks cannot trade by themselves but through brokers, Bitcoin trading can be carried out by almost anyone interested. In Bitcoin margin trading, the traders buy Bitcoin when prices have dropped and sold when the prices have increased, by using a trading platform

What is Bitcoin Margin trading?

Basically, Bitcoin margin trading means trading with burrowed bitcoins, hence increasing the amount used to trade. A margin trader can carry this out through the help of an exchange that allows Bitcoin trading. Margin trading could be highly profitable, yet quite risky.

How to begin Margin trading?

To start, Bitcoins have to be acquired and transferred to an exchange account. Exchange accounts have three places where funds can be stored: exchange, margin and lending accounts. The exchange account contains the money used for actual trading, the margin account contains the amount used for collateral, and the lending account contains funds that can be loaned to other traders for interest.

The next thing to do is to borrow funds and make a trade, then a position will be opened, either a Long position (if you buy, anticipating that prices will go up) or a Short position (if you sell, expecting prices to go down). After this, choose a leverage, i.e., 1:1 meaning that if you have 2 BTC, you can borrow 100% of your money, which is 2 BTC and then have 4BTC with which to trade. Other leverages include 2:1, 3.3:1 offered by exchanges like CEX.IO, 20:1, 50:1 or even 100:1.

Related: BITCOIN EXCHANGES 2018

Long position

When you open a long position, it means you want to make profits, from the increasing price of Bitcoin. Let’s say you have 1 BTC worth $1000 and you choose a Long position with a leverage of 1:1; then you can borrow another 1 BTC and trade with 2 BTC, hence increasing profitability.

When you trade with this 2 BTC, and you close the position when the price is up to 2.5 BTC, the 1 BTC borrowed will return to the exchange, and you will have a profit of 0.5 BTC minus the necessary charges, which is double that you would have made had you not borrowed.

Short position

When you open a long position, it means you want to make money when the price of Bitcoin goes down. For instance, if the price of 1 BTC is $1000 and you choose a short position and a leverage of 2:1, then you can trade with 3 BTC. You can sell the 3 BTC for $3000, and when the price of Bitcoin decreases to say $800 as expected, you close the position and buy back the 3 BTC now for $2400.

The 2 BTC you borrowed then returns to the exchange, and you can have a profit of $600 minus the fees charged by the exchange.

Very reputable Exchanges, where margin trading can be carried out, include CEX.IO, Poloniex, Bitfinex, GDAX, Bitmex (which offers leverage of up to 100:1), among others. Bitcoin margin trading is quite simple, nonetheless, except the risk of a wrong prediction which will lead to a loss, and a forced liquidation, there is also the risk of losing your money to cyber theft, as Exchange trading accounts are not as secure as wallets.

Also Read: BEST BITCOIN EXCHANGES REVIEW 2018

Expert’s Advice

Good advice to heed for beginners in Bitcoin margin trade is to start small and don’t trade with all your money, keep some behind because as interesting as it may look, not everyone will make a profit.

Related: A REVIEW OF THE BEST BITCOIN WALLETS 2018


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About the author

Tayyab M

I love to talk about global tech-happenings, startups, industry, education and economy.

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