Bitcoin margin trading is one of the most popular ways for digital asset traders to bet on the price of bitcoin. However, it is also one of the easiest ways to lose money trading bitcoin.
In this guide, you will learn what bitcoin margin trading is, how it works, and what platforms you can use to trade bitcoin using leverage.
What is Bitcoin Margin Trading?
Margin trading refers to using funds borrowing from a broker to increase the size of a trading position to potentially increase profits on the trade. Bitcoin margin trading follows the exact same process as traditional margin trading.
Bitcoin traders can borrow funds to increase their buying power. The borrowed funds mean interest payments, but many users find it worth the cost due to the potential gains with 4:1, 10:1, or even 100:1 possible leverage.
If an investor puts down $50 on a 10:1 leverage ratio, they will have buying power equal to $500 with $450 of it consisting of borrowed funds. Exchanges can forcibly “call” in their loans if the investment gets close to losing the borrowed money.
Traders with the confidence to trade on margin can find a number of exchanges that offer the lending service. But users must meet certain criteria or at least verify capital requirements on most platforms.
For example, GDAX only allows accredited investors to utilize the margin trading feature. It’s a rule set by the platform to ensure their users will have enough capital to cover the borrowed funds if the investment were to walk off a cliff.
Traders can leverage short or long term, and many choose to do both in order to hedge their bets. It’s important to keep in mind that all borrowed funds must be paid back with interest, so only borrow what you’re willing to cover in the event of a total loss.
Pros and Cons of Bitcoin Margin Trading
Bitcoin margin trading combines one of the riskiest trading techniques with one of the riskiest assets on the market. It has incredible upside potential coupled with monumental risk.
The benefits and drawbacks of bitcoin margin trading are as follows:
- Boost in purchasing power: The lending aspect of margin trading allows investors to purchase beyond their account, giving them the ability to buy more of an asset via borrowed funds
- Investment options, i.e short-selling, hedging with long and short term: Margin trading provides more flexibility when choosing an investment strategy
- Exponential growth potential: Traders with minimal capital can increase profit potential
- Stress of using borrowed money to make investments: Investing is stressful enough, adding loans, interest rates, and more risk only increases investor anxiety. Not every investor can sleep easy knowing that borrowed money is at risk.
- Interest payments on loaned funds: Interest can accrue quickly on margin loans, and rates tend to be higher for digital asset investments.
- More risk via increased loss potential: Investment risk factor increases by an order of magnitude, so investments must be chosen with extreme caution.
- Margin calls: When your margin position moves against you and you don’t have enough funds on your margin account to cover the loss, you will receive a margin call to top up your funds. If you call to act, your position will be closed out by the exchange.
Types of Bitcoin Leveraged Trading Products
Digital asset exchanges offer various levels of leverage. For example, BitMEX allows investors to leverage up to 100:1 on some contracts, but the acceptable leverage will ultimately be determined by the initial margin (amount of equity required to open a position) and the maintenance margin (minimum equity to keep the position open).
Although margin trading should be left to experienced professionals, learning the basics of margin trading products is relatively easy.
People who are unfamiliar with financial markets may not even realize they have the ability to bet against the market rather than having to solely focus on whether or not the bulls will go for a run. Margin short selling digital assets is a straightforward concept; investors can increase their buying power with borrowed funds in order to make their bet against the market much heavier. If the value of the digital asset decreases, the investors make money. In contrast, an increase in value would decimate the margin contract.
SHORT SELL EXAMPLE: Investor uses 10x leverage to sell 1 BTC at $10,000, initial margin is only $1,000.
|Percentage Change||Price||Profit/Loss in USD||Profit/Loss %|
The majority of investors will likely feel more comfortable going long or betting. Long margin trading comes with significant risk, but the payoffs can be exponential. As seen in the chart below, the potential gains are astonishing when you combine leverage with the volatility of digital assets.
LONG BUY EXAMPLE: Investor uses 10x leverage to buy 1 BTC at $10,000, initial margin is only $1,000.
|Percentage Change||Price||Profit/Loss in USD||Profit/Loss %|
What are the Best Margin Trading Platforms?
|Exchange||Description||Taker Fee||No. of coins available for margin trading||Leverage Available||Trustpilot Rating||Twitter Followers||Score|
|FTX||FTX, a leveraged cryptocurrency exchange built by the Almeda Research Group, offers advanced derivatives trading among other products such as volatility indeces and leveraged tokens. FTX launched in 2019 with a focus on building a platform designed for the modern trader. The Antigua-based exchange specializes in leveraged products and currently offers its services globally except for those investors residing in United States, and a handul of other countries.||0.07%||13||up to 20x||4||15,000||4|
|Binance||Binance is one of the youngest cryptocurrency exchanges in the market as it was only launched in 2017. Nonetheless, it has managed to quickly establish itself as one of the leading exchanges. Binance supports over 100 digital assets and provides an intuitive trading platform that even beginners will find easy-to-use once they get the hang of it. The Malta-based exchange now has over eight million users across the globe.||0.02%||6||up to 5x||3||1,100,000||3.8|
|Prime XBT||Prime XBT is a bitcoin-based platform, offering leveraged trading on several digital assets including bitcoin, Ethereum, Litecoin, and Ripple. PrimeXBT offers a robust trading system for both beginners and professional traders that demand highly reliable market data and performance. The entire infrastructure is designed to facilitate high number of orders per second and extreme loads, while offering ultra-fast order execution and low latency.||0.05%||5||up to 100x||4||24,700||3.8|
|Kraken||Founded in 2011, Kraken was the first bitcoin exchange to have its market data displayed on the Bloomberg Terminal, the first to pass a cryptographically verifiable proof-of-reserves audit, and one of the
first exchanges to offer leveraged bitcoin margin trading. Kraken is trusted by millions of traders, institutions, and authorities across the world, from Toyko’s court-appointed trustee to Germany’s BaFin regulated Fidor Bank. In 2019 Kraken acquired Crypto Facilities, a registered futures platform.
|0.02%||6||up to 5x||2||392,900||3.7|
|BitMEX||BitMEX is a P2P crypto-coin trading platform that gives retail investors access to the global markets using cryptocurrencies. As one of the fastest-growing companies in the cryptocurrency and fintech space, it provides a unique, trading-focused experience to digital currency markets. BitMEX is the world’s largest bitcoin/USD trading platform by volume, though US residents cannot use the service, per the site’s terms of service.||0.08%||6||up to 200x||3||19||3.6|
|Huobi Pro||Established in 2013, Huobi has become one of the world’s largest digital asset exchanges. Having once accounted for half of the world’s digital asset transactions, Huobi now serves more than 5 million users in over 130 countries around the world.||0.20%||11||up to 5x||3||163,600||3.3|
|Poloniex||Poloniex is a leading digital asset exchange and was one of the first altcoin-focused trading platforms in the market.||0.20%||11||up to 2.5x||2||249,200||3|
|Coinbase Pro||Formerly known as “GDAX”, Coinbase Pro was launched in 2015 as an extension of Coinbase. The professional trading platofrm enables high volume digital asset investing along with other advanced features, like margin trading, not included on the orginal Coinbase exchange. Among those offered are additional security measures, increased liquidity, lower fees, and more. Coinbase Pro also features a more complex user interface that converys far more information per page than its rudimentary counterpart.||.04-.5%||8||up to 3x||3||194,500||2.6|
Bitcoin margin trading is one of the riskiest digital asset investment approaches. So it’s best to leave this particular technique to the professionals or those willing to lose massive sums of money.
Having said that, exchanges that offer up to 3x leverage present a unique opportunity for investors with little capital. Although interest rates and margin requirements limit investors, the profit potential for a well-researched and calculated 3x leverage trade is more than appealing, and the capital requirements won’t be astronomical.
Just remember, with great leverage comes great responsibility.
Subscribe to Bitcoin Market Journal to stay up-to-date with the latest developments in the digital asset markets.