Would you like to increase your return on investment?
With margin trading, you can potentially get more with less. By borrowing funds through exchanges, you can generate stronger returns through bitcoin trading.
To get a better sense of how this works, imagine that you are playing poker with some friends. You know you have a great hand, and you want to bet more than the $50 you have available to wager. Your friend offers to lend you $100, and after using his borrowed money, you end up having the best hand at the table.
Because you were able to borrow some money, your return was higher. However, if another player had produced a better hand, you would have ended up losing both the $50 you had originally and the $100 you borrowed.
Keep in mind that margin trading is a highly risky venture, and bets that do not work out can result in notable losses.
Margin Trading Basics
Before you dive in, it is good to know the basics of trading bitcoin on margin. For starters, you need to have an account with a cryptocurrency exchange that offers leverage in your country.
Once you set up one of these accounts, you must obtain approval for any amount you want to borrow, a decision that is based on variables such as which exchange you are using and the currency pair you are trading.
GDAX Margin Trading
For example, if you want to use borrowed money to trade bitcoin through GDAX, you have to enable margin trading at the top of the margin trading panel. Further, if you have access to USD order books, you will need to take the additional step of certifying that you are an Eligible Contract Participant.
Once you are set up to trade margin through GDAX, the amount of leverage you can access depends on which currency pair you want to trade.
For BTC/USD, you can use 3x leverage. What this means for practical purposes is that if the combined value of your BTC and USD balances stands at $1,000, you can purchase or sell $3,000 worth of BTC/USD. For that particular pair, GDAX lets you access up to $10,000 in margin.
However, if you want to trade the BTC/EUR pair, GDAX offers 2x leverage and a funding limit of €3,000.
Kraken Margin Trading
Kraken bases the amount of margin you can borrow on verification tiers. To access greater leverage, you need to provide more information to the exchange. While Tier 0 only requires an email address, it will not allow you to borrow any funds.
Tier 1, which will allow you to borrow $3,000, €3,000 or 10 BTC, requires you to supply additional information, including: your full name, date of birth, phone number and country. Tier 2, which offers leverage of $10,000, €10,000 or 50 BTC, requires that you provide your physical address as well.
Keep in mind that once you qualify for one of these tiers, the margin amounts available through the differing currencies are independent of each other. In other words, Tier 2 verification means you can borrow both $10,000 and €10,000, if you want.
Bitfinex Margin Trading
If you want to borrow funds to trade bitcoin through Bitfinex, the process is slightly different from other cryptocurrency exchanges. Through Bitfinex’s peer-to-peer lending platform, you can receive funding for up to 70 percent of a cryptocurrency purchase.
In other words, you can borrow $700 for a $1,000 bitcoin transaction, requiring you to deposit only $300. Using the trading center, you can borrow funds in the amounts, durations, and rates that are available.
These variables are dependent on the terms offered by those who use Bitfinex’s Funding Wallet to offer funds to those seeking financing.
If the value of your account falls to a certain level, a margin call will be triggered. What this means is that if you want to keep your account open, you will need to add more funds or sell off certain assets to bring your balance to the required level.
Keep in mind that, if needed, many exchanges have the authority to liquidate as many positions as needed in order to bring your account current. Kraken, for example, has the flexibility to close some or all of a margin trader’s positions to bring his or her account to the desired level.
Bitfinex’s terms and conditions also grant the exchange wide leeway to ensure that borrowers are repaid in full.
While this may all sound a bit intimidating, trading bitcoin on margin can be a lot less nerve-wracking if you employ proper risk management. Even though an exchange offers you significant leverage, that does not mean you have to use it all.
For example, if you place $10,000 into an account and use 2x leverage to open a $2,000 long position on bitcoin, you are borrowing only $1,000 to make this transaction. If you lost everything you borrowed, you would still have $8,000 worth of equity left in your account, an amount that would keep you safe from the risk of liquidation.
However, if you decided to take a riskier approach by using the same $10,000 account to open a $7,500 position using 3x leverage, a significant loss could put your account at risk of liquidation. If, for example, the $7,500 position lost all of its value, you would be left with 25 percent of the original $10,000 amount.
Summing It Up
Trading bitcoin on margin can be highly profitable, but keep in mind that it is a highly risky venture. If you want to take this route, you could profit quite a bit from using a sound risk management strategy that allows you to benefit from leverage but also protect your account from liquidation.
In addition, be sure to familiarize yourself with the complex margin trading rules that exist for any exchange you might use. For more information on how to trade bitcoin effectively, subscribe to Bitcoin Market Journal today!