Understanding the Risks and Benefits of Margin Trading with Crypto

Not every user of crypto exchange has considerable capital, thanks to which you can trade on the crypto market and get even more profits. What to do if you do not have a lot of finances but still want to earn good money from trading? At such times, a great solution to this issue is margin trading in cryptocurrency. 

In the crypto world, margin trading has become one of the great methods through which investors can significantly increase the size of their investment portfolio. But this type of trading contains both risks and benefits. It's time to understand how margin trading works and whether you should use it.

Margin trading in details

Margin trading is when traders open positions on trading to sell or buy assets, using the credit funds from the platform or broker. If during ordinary trading on the market, traders use exclusively their savings from purses, then margin trading enables traders to increase their potential earnings by increasing the size of trading positions, thanks to credit funds.

The whole principle of margin trading is that a user must deposit a certain amount (margin) into his account, and based on this margin, he has access to more cryptocurrency than the trader can buy for the number of funds in his wallet. Increased profit is achieved by using different levels of leverage.

Advantages of margin trading

To understand why this type of trading has become so popular among users of cryptocurrency exchanges, it is worth getting acquainted with the advantages of margin trading.

1. Potential profits go up

Margin trading allows traders to earn more if the rate of the cryptocurrency changes and exactly in the direction that the trader predicted. Using only one's own funds, it would not be possible to make high profits in a short period of time. 

2. Varieties of strategies

Traders use margin trading as an opportunity to try out new market strategies. These can be either short-term trades or long-term investments, in addition to operations with speculation for high earnings. It helps to adapt to volatile market conditions and use different instruments to your advantage. 

3. Portfolio diversification

Thanks to margin trading, users can conveniently allocate trades and investments across different cryptocurrencies. This reduces the risk of losing invested funds and protects your portfolio.

But remember that margin trading has high risks. If your potential profit increases, it means that the level of losses also increases at the same time. You should always be mentally and financially ready for possible failures and prevent them by using the stop-loss function on orders.

Risks of margin trading

In addition to the benefits, margin trading also has a negative side, expressed in the risks for traders. And it is always worth considering these risks to protect yourself from unforeseen financial losses.

1. Loss of finances

Using credit can significantly increase your potential losses. If you were counting on a rate hike and the market moves in the opposite direction, you could lose more money than you invested. High leverage increases the chance and rate of your downside, towards a significant loss of money. That is why you should be especially careful with high-profit multipliers, especially if you are a beginner. 

2. Market Volatility

Cryptocurrency markets have always been widely known for high volatility. This suggests that the value of crypto coins can change dramatically in a short period of time. If the market price changes and is not at all in favor of your order, you are likely to incur a loss.

3. Margin Call

Platforms and exchanges with margin trading impose certain requirements to maintain a margin price. Your losses must not exceed a certain level, otherwise, the platform will require you to fund your account, thereby increasing the amount of margin (margin call) to maintain your position in the market. If you have not funded your account in the allotted time, then the parts will automatically be closed and you will incur a loss.

Withdrawal

To summarize, it is important to note that margin trading, as well as trading with multipliers, is a trade with high risks, and not everyone can find an approach to it to always be in the black. Trading requires attention and an understanding of how it works. You must consciously use margin trading and also know how to manage risk.

Be prepared for losses, especially in the early stages. But don't forget that margin and leverage can help you increase your already good profits. 

It is highly recommended that you seek the advice of professional and successful financial advisors before you begin margin trading. And it is additionally worthwhile to study all the conditions, trading rules, advantages, and risks.

First, weigh the pros and cons and only then proceed to margin trading.