Bitcoin Margin Trading – A Beginner’s Guide

Last updated: 9/29/19

The potential to double or triple one’s holdings is often just a mere trade away, especially when margin trading. This post explains what Bitcoin trading is in a nutshell, and what is Bitcoin margin trading.

Bitcoin Margin Trading Summary

Margin trading, also known as leveraged trading, is a form of trading that uses borrowed funds in order to trade larger amounts of a specific asset. For example, if you have 1 Bitcoin on Binance, you can borrow up to 2 Bitcoins more and trade as if you had 3 Bitcoins.

While margin trading increases your profits when successful, it also accelerates your loses when unsuccessful.

BitMex
Leverage:
100:1
CEX.io
Leverage:
10:1
Binance
Leverage:
1:3
Bitfinex
Leverage:
3:3:1

That’s Bitcoin margin trading in a nutshell. For a more detailed post keep on reading, here’s what I’ll cover:

  1. What is Bitcoin Trading?
  2. What is Bitcoin Margin Trading?
  3. Where Can I Margin Trade Bitcoin?
  4. Conclusion

1. What is Bitcoin Trading?

Bitcoin trading is the act of buying low and selling high. Unlike investing, which means holding Bitcoin for the long run, trading deals with trying to predict price movements by studying the industry as a whole and price graphs in particular.

Here’s a crash course in the basic terms of trading:


2. What is Bitcoin Margin Trading?

One extremely profitable yet risky trading strategy is margin trading, also known as leveraged trading. This simply means that traders borrow capital at relatively high interest rates to increase their leverage.

If things go right, huge gains can be expected. On the other hand, the wrong move could end up breaking traders as they battle high interest rates, margin calls, and order liquidation (both explained below).

Some exchanges offer 1:1 leverage, meaning that traders can borrow 100% of their holdings. For instance, a trader with a balance of 1 BTC will effectively be able to trade 2 BTC, increasing profit potential.

Other exchanges offer 2.5:1, 3.3:1, 20:1, and even 100:1 margins. With 100:1 margin trading, I can find myself either up 500% in minutes or liquidated in the blink of an eye. It’s more like playing the slot machines at the casino, so I don’t necessarily recommend it.

When things go right, it’s obvious that traders have the potential to earn a significant sum of money by leveraging capital through margin trading.

Traders who understand risk management should be able to avoid losing their entire bankrolls in a few trades. Such traders have the potential to earn way more money by leveraging capital than they could by using their personal funds only.

However, margin trading doesn’t come cheap, as borrowed funds are subject to high interest rates. These charges are automatically withdrawn the moment a position is closed out. In addition, trades that don’t go as planned often end up liquidated, resulting in a total loss.

Margin Calls

If a margin trade goes in the wrong direction, individuals will be required to add funds to their accounts in order to avoid order liquidation. This is known as a margin call. If a trader is unable to provide further funds to secure an order, it will be closed out automatically.

Liquidation

If a margin trade loses more money than the trader has on hand, the trade will be liquidated. This means the position will automatically close and the trader loses all of his money. Chances of liquidation increase dramatically when margin trading. Let’s explain with an example:

Let’s assume you have only $100 and you buy $10,000 worth of Bitcoin (with a 100x leverage). If Bitcoin’s price drops by $1, you effectively lost $100 because of how much you’re leveraged. In this case, you don’t have any more money in your account and your trade will be liquidated.

As you can see, leveraged trading goes both ways – increased profits but also liquidation happens on much smaller price movements.


3. Where Can I Margin Trade Bitcoin?

Margin Trading on Bitfinex

Bitfinex offers 3.3:1 margin trading. Simply put, traders can borrow $7 for every $3 they have in their accounts. Since Bitfinex is the biggest Bitcoin exchange in the world by volume, traders should start there.

You can read my complete Bitfinex review here.

Margin Trading On CEX.IO

CEX.IO offers 10:1 margin trading through CEX Broker. The site allows you to trade Bitcoin and Ethereum CFDs. CEX Broker also supplies demo accounts for those who want to gain some theoretical experience before putting down real hard cash.

You can read my complete CEX review here.

Margin Trading on BitMEX

Investors who want to throw all caution to the wind and attempt to maximize their profits may want to margin trade at 100:1 leverage on Bitmex.

When things go right, it’s like a rocket ship launching to the moon—yet one small move in the opposite direction will entirely liquidate an order. A word of caution: start by trading small amounts.

You can read my complete BitMEX review here.

Margin Trading on Binance

Binance allows 1:3 margin trading for Bitcoin, Ethereum, XRP, Binance Coin, Tron, and Tether. Users can also lend cryptocurrencies on Binance for interest in order to fund margin activities by other traders.

You can read my complete Binance review here.


4. Conclusion

Margin trading is a risky business. Beginners should start out trading small amounts at a margin of no more than 2:1. Ideally, never use 100% of funds in any one transaction.

For instance, placing $1,000 into an account and using only $100 of personal capital with 2x leverage per transaction would still leave a trader with $900 if their margin trade didn’t work out.

In general margin trading is suitable for experienced traders. If you’re just starting out it’s better to use demo accounts or trade without any leverage before taking it up a notch.

Is margin trading for you? Have you ever had experience with it? Let me know in the comment section below.

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Chris

I would like to use out of the money options to collar the larger moves. Do you know of anyone who could advise me?

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D4rr3LL

Enjoyed your piece Wolff of Blockchain.

Informative and broken down quite nicely, Thank you.