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5 Things You Should Know About Margin Trading

5 Things You Should Know About Margin Trading

Wednesday August 07, 2019,

4 min Read

Margin Trading

Cryptocurrency trading is a booming activity. According to CoinMarketCap, the daily trading volumes over the past couple of months peaked at $114.5 billion. Experts suggest that in a few years, the cryptocurrency market cap will surpass $1 trillion.

Additionally, the Bitcoin has been on the rise of late and is already cruising in the five-figure valuation. Moreover, the steady rise of white label crypto exchanges is fueling cryptocurrency adoption by offering users with easy accessibility. Any trader would compel you that now is the right time to enter this industry. Previously, one would need a substantial amount of money to make gains in dealing cryptocurrencies. Fortunately, that's not the case anymore. Thanks to Margin Trading, one can easily place large bets on the market and reap exorbitant rewards.

Margin trading simply refers to the practice of borrowing funds to purchase more of a particular financial asset with the intent of amplifying profits. Usually, brokers or banks extend this facility and charge a nominal interest rate on the loaned amount. The user is then liable to pay the total sum to the lender back within a stipulated timeframe. However, there are a few things one needs to understand about this trading option.

Know Your Market

The saying, knowledge is power comes very handy when employing this option. A trader who is aware of the different trends and makes accurate predictions can make a killing in this segment. In case, one is not adept with the shifting myriads of the market, they can always mirror industry leaders. Many platforms allow users to copy the orders of top traders that help enable novices to enjoy and profit from the activity as well.

Borrowing Is Key

This trading option is heavily dependant on the borrowing factor. Individuals planning to participate in margin trading will have to find reputed lenders. Luckily, this is neither an uphill task nor does it involve any mob bosses. Today, many platforms feature a structured loaning facility. Users only have to complete the necessary KYC and credit score assessments, and they can borrow funds with ease. However, it is important to note that just like any other loan, the principal amount borrowed will have to be paid back with interest. Usually, the interest rate is a fixed number or a percentage of the principal sum.

Also Read: How to Build a Cryptocurrency Exchange and How Much It Would Cost?

Multiply Your Earnings

As it was mentioned before, margin trading allows users to leverage fluctuating cryptocurrency trends to earn a profit. If the predictions and market movements match, traders can earn upto 2x, 3x, or even 10x returns on the amount invested. To an outsider, it may sound like a quick-rich scheme or even gambling, but it is perfectly legal. This is because a lot of skill and practice is required to identify market subtleties precisely.

Susceptible To Risk

Every coin has two sides, and margin trading is no different. While it allows one to earn handsomely, one can even lose money in the endeavor. Given the high volatility of cryptocurrency prices, it becomes impossible to predict which way the market will go accurately. Plus with a sordid history of pump-and-dump and short selling, it is very easy to slip and fall into debt.

Not For Everyone

This trading option can be compared to Papa Legba, a trickster deity popular in West African lore. Just like Papa Legba provides to the cunning, he reaps from the unsuspecting, margin trading also operates in the same fashion. Since the risk factor associated with this segment is really high, it is very easy for inexperienced traders to incur heavy losses. That is why most platforms, as well as experts, advise this option to only seasoned veterans.

Margin trading is a double-edged sword. If not employed judiciously, it can prove detrimental to a trader. Hence, it is advised to do proper research before venturing into this segment. One could always turn to trade simulators available online to learn more about this feature.