Margin trading with cryptocurrency allows users to borrow money against their current funds to trade cryptocurrency “on margin” on an exchange.
A margin account provides you the money to buy more than you can afford.
What is an Option Contract?
An option contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell an asset at a later and agreed upon price.
What is a Long Position?
If you buy an asset with the expectation that the price of the asset will rise, that is a long position.
If I opened a long position with x1 leverage for Bitcoin. Lets assume, I bought 1 BTC for 4000 USD.
But remember, I am buying contracts, not physical assets.
After a week, BTC rised from 4000 USD to 5000 USD and I closed my long position.
That means, I made 25% profit from my trade.
Long positions are easy to understand, as we all doing it with or without leverage.
What is a Short Position?
A short position is borrowing an asset with the expectation that the price of the asset will decline.
Short selling is an way of investing to get profits from the price drops.
If I sell short 1 BTC with x1 leverage when the price of BTC was 20.000 USD. This means I borrowed 1 BTC from the exchange and sold it to 20.000 USD and I will pay it later because I am expecting a price drop. As a result I am going to pay less.
When BTC price dropped to 5.000 USD, I wanted to close my contract which means I am buying BTC from 5.000 USD and giving it back to the exchange.
My total profit = 20.000 USD – 5.000 USD = 15.000 USD
What is Take Profit?
Take profit is an additional order which you can make part of your buy order.
It works simple:
Lets assume that I opened a long contract, basically a take profit order is taking profit (closing contract automatically) if the price goes to a certain level.
What is a Stop-Loss?
It works like the opposite way of “take profit”. Basically, if the price goes down and I am holding a long contract, I am giving an order: “close it if it drops a certain level”.
How Leverage Works?
Leverage is the strategy of using borrowed money to increase return on an investment.
Let’s say I have only 100 USD but want to open a long contract with 1000 USD.
I am using x10 leverage and the exchange lends me 900 USD.
If I get 10% from my trade, 1000 x 10/100 = 100 USD is my profit.
What is Liquidation Price?
In Margin Trading, every position has a Liquidation Price based on their Maintenance Margin rate, entry price, and leverage. Liquidation price is the price that a trader lose all his/her initial margin.
This is the downside of the margin trading as you can lose all of your money if you are using high leverage.
If I opened a long contract with my 100 USD and bought BTC from 3.800 USD. Let’s assume, I am using x25 leverage which means I borrowed 25 x 100 – 100 = 2400 USD and assume that my liquidation price is 3.600 USD which means if BTC drops to 3.600 USD, I will lose my 100 USD.
The more leverage I get, the higher liquidation price will be.
Bitcoin and Crypto Margin Exchanges
Bitmex, Kraken and Bitfinex are the most popular ones. Personally, I am using Bitmex for BTC margin trading.
I will write a detailed guide about Bitmex Margin Trading soon.