Is Margin Trading a Safe Way to Trade Cryptocurrency?Jun 15, 2022, 4:10PM
Cryptocurrency exchanges that offer margins, loans, and other lending instruments are becoming more popular tools among traders.
With the rise in popularity of margin trading comes a new type of trader — one who uses leverage to trade cryptocurrencies on an exchange.
What is Trading with Margin?
Here’s how it works: You deposit some cash into your account and wait until you can withdraw it again (usually within two hours). Then, you buy tokens at market prices using borrowed money from the exchange. If the price goes up during those two hours, you make more than if the price went down. Your goal is always to come out ahead while minimizing losses. While buying low and selling high isn't necessarily risky per se, it does require discipline and smart risk management. Leverage can multiple gains but also multiply losses.
Margin Trading Carries Significant Risk
Margin trading has many benefits. For example, there may be times when margins aren't sufficient enough to keep pace with volatile markets or to take advantage of opportunities. When this happens, investors often turn to other avenues such as futures contracts, options, or shorting stocks. This process involves borrowing additional funds from traditional banks which could lead to interest charges. Margin positions are typically held for shorter periods of time because the risk of loss is multiplied. Good recordkeeping and cryptocurrency accounting is crucial when trading both on margin or spot. This will allow for maintaining the correct collateral ltv and cost basis which is the cornerstone of determining any tax liabilities, depending on one’s jurisdiction.
Loss of Collateral
Margin trading allows users to borrow money directly from their crypto assets; thereby avoiding any kind of extra costs associated with these loans. This feature gives people flexibility to maximize profits by choosing the right time to exit positions. Margin trading provides access to larger amounts of capital compared to what would otherwise be unavailable through standard investing methods. Since margin accounts allow customers to use borrowed money, they're usually eligible for higher limits, enabling them to invest much larger sums of money in comparison to other types of clients.
If you want to get started with crypto margin trading but don't know where to begin, here are five platforms we recommend for expert traders who understand the risks involved:
Crypto Exchanges that Offer Margin Trading
Binance is the largest cryptocurrency exchange by volume, according to CoinMarketCap, with over billions of dollars of volume everyday. Binance is one of the most reputable exchanges, going through audits regularly. Their CEO, CZ, is active on Twitter. Binance offers the products that suit the most advanced traders, including margin and:
Coinbase has the most volume for a USA-based exchange, with billions traded everyday, and always ranked in the top ten exchanges by volume. Coinbase Pro trades all major coins including Ethereum, Litecoin, Bitcoin Cash, Stellar Lumens, EOS, Cardano, IOTA, Zcash, Tether
USDT, Tezos, Chainlink, Basic Attention Token (BAT), Polygon Network (XVG), Dfinity
Blockchain (DAG), Algorand, 0x Protocol, Maker, Orchid, Civic, Aeternity, and so many others.
Bitfinex is one of the original exchanges to offer margin trading. Bitfinex was founded back in 2012 and has stood the test of time. Bitfinex offers margin lending to allow users to lend their crypto and earn yield to investors looking to borrow and multiply their positions.
Another well-known global crypto exchange platform offering support for over 200 different cryptocurrencies,. Today, it ranks within the top ten highest-volume cryptocurrency exchanges worldwide. At present, it supports both fiat currency deposits and withdrawals. Trading fees are competitive with Binance and FTX.
FTX Global Exchange
Founded in 2019, FTX Global Exchange is yet another top crypto exchange platform based in Singapore. Currently, it supports 13 different currencies, including euros, pounds, and renminbi. Aside from being user-friendly, it's equipped with advanced technology and infrastructure required to handle massive traffic. Besides having a solid reputation in the industry, FTX has partnered with several financial institutions around the globe.
Each of these platforms offer various services and the selection of an exchange should be dependent on personal preference and local regulations requirements. Many investors utilize multiple exchanges, so we believe that none of them should be overlooked. Before depositing any money with any given platform though, consider researching its track record before deciding whether it meets your specific criteria.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.