Trading cryptocurrencies like Bitcoin is a proposition with known risks. If you’ve been paying attention to this space for more than a couple of years, you’ve seen Bitcoin selling for $1,000, to be followed months later by Bitcoin at $20,000. Following the long, slow bleed of the period after 2018’s crypto price crash, we’ve actually seen Bitcoin and other market leaders stabilise (at least compared to pre-2018 performance). Perhaps this is why margin trading is entering the cryptocurrency investment industry.
So, what is margin trading with Bitcoin? Basically, it’s a way for traders to buy more Bitcoin than they could afford on their own, by borrowing money from an exchange like Bitmex. For example, let’s say you have $1,000 worth of cryptocurrency in your exchange account. But you have your sights set on $2,000 of another cryptocurrency. By using that $1,000 in crypto as collateral, certain exchanges will let you buy anywhere from 2X to 400X time value of that margin.
Bitcoin margin trading is highly risky but highly rewarding.
Image source: Rasica/Shutterstock.com
If you trade on margin this way (this is sometimes called “leveraged trading”), you don’t have any problems if the price of Bitcoin (or another cryptocurrency you’re invested in) rises. You can sell, pay back the money you borrowed from the exchange (plus interest), and pocket your profits. However, this is not what happens if the value of your cryptocurrency investment starts to drop.
There’s a point at which the exchange you’ve borrowed money from will simply liquidate your investment. The price falls beyond a certain threshold, and the exchange knows that if you lose all of your money, they won’t get paid. So algorithms sell your investment and the exchange takes back what it is owed. If there’s any left over, you can walk away with it. But oftentimes, there is nothing remaining in a losing margin position.
This is why margin trading is considered very risky, even in conventional investments. For cryptocurrency, which is notorious for volatility and sudden price flashes, margin trading is seen by many as a fool’s errand. Sure, large exchanges like BitMex, Cex.io (see our Cex.io review), and Kraken might give you the option to leverage yourself to the neck, but this is only recommended for people who really understand what they’re doing, and who can afford to lose their original investment if things do not go right.
If you have a sum of money that you could afford to lose, and you want to risk it all on a highly leveraged margin trade, go for it. It could work out. But don’t invest in cryptocurrency without acknowledging the risks, especially if you are into margin trading.
Featured image source: Morrowind/Shutterstock.com