With the cryptocurrency market making bullish signs and staggering gains, more and more people are thinking about trying margin trading. They realize that when the prices are moving upward, their chances of making profits are greatly magnified this way. But of course, there are no guarantees. Margin trading can be risky and lead to serious losses as well.
What Exactly Is Margin Trading?
Margin trading in cryptocurrency essentially means borrowing funds that you don’t have from the exchange in order to place bigger trades. The same thing can be done in the traditional stock market using what’s known as leverage, except that, in this case, the trader is buying digital assets.
Margin trading allows traders to earn substantially more profits from their investments by borrowing against their funds. Say, for example, you wanted to buy $1,000 worth of BTC futures contracts on our platform, but you only had $250.
We would lend you the $750 that you needed at leverage in this case of 4x. Your initial margin is $250 as these are the funds that you deposit. However, keep in mind that Digitex will be offering up to 100x leverage on our exchange.
So what’s the point of buying futures on margin? Well, it increases your buying power immediately and can substantially increase your profits if you make the right calls. However, the cryptocurrency markets are highly volatile and margin trading isn’t for novice traders.
If your trade goes wrong, you could find yourself coming into contact with our Liquidation Engine and losing your funds completely.
On all other futures exchanges, remember that as well as your initial margin, you’ll have to pay increased fees and/or interest as well. As Digitex is a commission-free exchange, we will not be charging commission fees for margin trading.
What Is a Margin Call?
The cryptocurrency industry is risky due to its high fluctuations and movements that are hard to predict. There is a chance to make much greater profits and higher losses than in traditional asset classes. This means that adding an extra risk vector like margin trading is often akin to playing Russian Roulette.
All exchanges have a maximum leverage in place so that they can be sure to fulfil their commitments in case a highly leveraged trader gets blown out in volatile markets. When margin trading on Digitex, the Maintenance Margin must be maintained above the minimum level so that the Liquidation Engine doesn’t have to intervene with a trader’s position.
The Liquidation Engine of the Digitex Futures exchange takes over and liquidates the positions of traders whose account balances have dropped below the required Maintenance Margin amount needed to maintain their open position.
If the prices of the underlying asset go in the same direction as the call (long or short) the trader can continue to keep their position open. This is because there is no risk of losing the exchange’s assets. If price moves in the wrong direction, however, the trader risks having his position liquidated.
In what is known as a margin call, in cases where you risk losing the exchange’s money, we will call in your margin trade. Since this type of trade can be high risk for the exchange, traders in this situation will suffer a penalty which will be allocated to the Insurance Fund.
You can avoid contact with the Liquidation Engine by putting down more funds or stopping your own order. When you’ve already lost substantial funds, selling at any price may not seem like the best idea. However, having your position liquidated will mean that you lose your initial Maintenance Margin as well.
Moreover, placing more money into a trade that isn’t going your way could be a recipe for disaster and lead to a loss of all your digital assets.
The Pros and Cons of Margin Trading
While margin trading can be risky and is not for novice traders, there are plenty of advantages to it. These include a high return on investment, the flexibility to trade when the market conditions are timely and you have little cash available, and greater investing power.
However, margin traders must be prepared to absorb large losses. Moreover, due to minimum margins, even a small move in the opposite direction could lead to the Liquidation Engine calling in your trade and liquidating your position.
Margin trading is popular especially in a bull market when the prices are going up and traders can take advantage of amplified gains. But remember that if it’s your first time trying it out, start with money that you are prepared to lose.
Digitex will be offering 100x leverage, which will give the experienced traders potential for massive gains–but could also cause them to be liquidated. If you think that margin trading is worth the risk, you’ll need a cool head and to make some sensible calls to avoid getting liquidated.