Margin Trading Crypto: What Is It & How Does It Work?

Margin trading in crypto is a way of trading with only a fraction of your own capital, plus using borrowed funds, or leverage, to increase buying power and boost profits. This somewhat risky way of trading the digital currency market is very popular among active investors with a larger risk appetite. The story of using borrowed capital and injecting it in search of bigger rewards is an old story on the street. As long as there has been a way to invest money in financial markets, or other investment vehicles, there has been a way to leverage your capital to amplify the result of your winnings.

Today we are going to break down the margin trading component in cryptocurrency investment and take a look at how it is done, why it is important, what the fees are, and some benefits and risks that will come along the way.

Most retail investors will find it very intriguing that they can make an initial deposit of only $500 as margin collateral and leverage this money up to 100 times and enter the market with a position size worth $50.000.

If you want to know how this works and why it is such an effective (but risky) investment method, stick around and read until the end where I highlight some of the biggest benefits that I have found in trading digital currencies on margin.

Table of content

What is margin trading in cryptocurrency?

Margin trading crypto is done by leveraging borrowed capital from your cryptocurrency exchange or broker platform to trade larger position sizes than you are normally capable of opening. An example of margin trading in cryptocurrency would be where a trader makes an initial deposit (his margin capital) and uses leverage to trade Bitcoin. The leverage ratio used also determines the margin required by the trader which is usually only a small fraction of the whole position size.

One thing to keep in mind when using borrowed funds that derives from a third-party liquidity provider is that you cannot lose this money. The only money you risk per trade is your own margin capital which is going to be sitting in your margin account. Now, there are two things that you need to be able to separate in order to have an easier time understanding this whole concept. Margin and leverage are two sides of the same coin but they are fundamentally different and they both serve a different purpose in margin trading cryptocurrencies.

Key takeaway:

  • Margin = Your own capital that you deposit
  • Leverage = The borrowed funds you receive from your exchange

Once you learn to separate these two factors you will instantly learn how to calculate your margin and how to control your risk, but more on that further down in this guide. They will go hand-in-hand throughout every trade that you enter on a crypto margin trading exchange.

Margin trading crypto example

To explain further how this works I will give you a quick example of two traders where one is going to enter the derivatives market and the other will trade the open spot market. In this example, Joe will trade a derivatives contract of Bitcoin with 1:50 leverage and Lisa is going to spot trade Bitcoin using only her own funds. Below are the outlined factors:

  • Both traders will open the position at the same time and they will close the trade at the same time.
  • They will both make an initial deposit of $2000.
  • They will make a 15% profit on the trade.
  • Both traders will use all their deposited capital.

Let’s see how the margin affects Joe’s position and let’s see how much money they both make. Below is the calculation.

Since Joe is using 50x leverage he will be able to enter the market with 50 times more buying power.

50 x $2000 = $100.000

Joe has $100.000 of working capital that he is using to open his position. Lisa on the other hand only has her $2000 and that is all she is going to use.

A 15% gain for Lisa is a profit of $300.

A 15% gain for Joe is a profit of a whopping $15.000.

That is the power of trading on margin when you are correct in your predictions and you make a profit. Keep in mind that this is a best-case scenario where we have used a high leverage ratio as an example. It is not impossible to make these kinds of gains in the crypto market since the volatility of the coins definitely approves of a 15% gain in any single day. The difficult part is to enter the trade with precision since your liquidation price is going to be very close to where you entered.

How margin trading in crypto works

Standard spot trading where you trade a spot market without leverage and margin trading is pretty similar with a few exceptions. Margin trading offers more buying power through leveraged contracts such as futures, swaps, CFDs, and other cryptocurrency derivatives products.

The big difference is that in a spot market you only have access to your deposited amount whereas on crypto margin trading exchanges you have access to a nearly unlimited amount of capital.

Let’s say that you open an account on a normal spot exchange and you deposit $500, you will only be able to open positions worth that amount, $500. However, if you deposit $500 on a margin platform you can leverage that amount up to 200x which would give you access to a position worth $100.000.

This works since your broker lends you money on top of your initial deposit, or margin capital, of $500.

This loan works automatically and you only need to worry about how much of a position you want to open, the rest is handled by the liquidity provider of the exchange you are using.

Once you choose your leverage ratio and open your position the capital you loan is actively working in the market. Once you close out the position your margin capital is returned to your account (plus or minus the profit or loss incurred on the trade) and the capital lent is returned to the crypto platform.

Modern margin platforms have created a seamless experience for active day traders and leverage is offered directly after an account is created and a first deposit is made.

Why margin is important in digital currency trading

Retail investors use margin accounts to leverage their cryptocurrency portfolios and this is for good reasons if you know how to do it because it can yield great returns both in the short and long-term.

As most beginner traders and investors lack proper funding, margin can serve as that extra juice that you otherwise can afford.

It is not required to pour thousands of dollars or euros into the crypto markets, however, if you want to make significant gains as an aspiring trader, you need to enter the market with some level of buying power.

To demonstrate how important margin is in crypto trading I will make a comparison between two trades taken with an 18% gain in Cardano during a breakout on a positive trading day.

We will call them trade A and trade B where trade A uses 30x leverage on a margin platform and trade B trades the regular spot market.

Both trades will be done with an account of $1500.

Below is a table that shows the difference in profits made between A and B.

Accounttrade A trade B
$1500+$8100+$270

Trade A clearly makes a bigger profit due to the increase in position size.

These are not made-up numbers.

They apply directly to the result of margin traded accounts and as long as you use the proper risk management and employ great strategies you can enjoy the same numbers.

Keep in mind that this is a high-risk strategy and should not be used by traders with a lack of understanding of margin traded accounts or how to properly manage market risk.

How to margin trade coins

Due to modern exchange platforms, the process of entering a margin traded contract is not difficult at all. Most traders will find it just as easy as entering a spot market.

A standard procedure looks like this:

  1. Choose an exchange platform, such as BitYard.
  2. Sign up with your email.
  3. Go through the KYC process.
  4. Fund your account.
  5. Select the contract that carries leverage.
  6. Pick a digital currency pair.
  7. Follow your strategy and enter the market.

It’s not more complicated than that.

You now have access to high multiples of your deposited capital.

Popular strategies

This style of investing calls for some high-quality strategies that are essential to assure maximized profits and the protection of your downside.

Your risk should be the main priority and a proper risk-management system is a key to long-term success.

Read some of the most popular margin trading strategies that you can implement today to improve your results:

  • Breakout trades – This is by far the most profitable strategy due to the momentum it provides and the high success rate. Breakouts happen on the upside and the downside when a market is ready to move out from a range that has been dominant for the past days or weeks. When a market breaks out from a range it usually accompanies high volume and increased volatility. The key is to enter early and heavy. Good breakouts don’t fall back into the range and it’s your job to read the price action going into the breakout.
  • Add to your winners – A very common strategy to push winners is to add to your winners. If you manage to enter early on a good trade, add to your position, and raise the stop-loss to break-even or profitable level below the price. The best trades don’t return to your entry price and therefore it can be very profitable to double or even triple your position when you hit a home run trade. This will push your monthly profits and will assure that you stay in the game for the long run.
  • Short-sell support lines – If you are going to short the market, the best time to do it is when the market breaks below a previous support level. A support level acts as a protection and safety zone for bullish traders and when the market surprises them by dipping below their support level it can cause a cascading effect of sell orders. When the market falls below this level, most of the stop-loss orders that the buyers added before will now become market sell orders that get triggered almost simultaneously. This creates high volatility and increased volume. If you can enter the market just as it breaks you will be able to enter with a tight stop-loss and with high volume.
  • Only risk 1% – The 1% rule says that you should only risk 1% of your trading capital. For example, if you have deposited $1000 in your account, your maximum risk per trade should not be more than $10. You should control your risk level with your position size and your stop-loss. The further away your stop-loss is from your entry price the smaller your position size will be. When you enter with a very tight stop-loss you can increase the position size while keeping the same 1% risk ratio.

Understanding margin calls and liquidation

A margin call happens before liquidation and it is a warning sign that your account is reaching the low-end of your margin requirement.

Since your margin capital always acts as risk capital, you need to have sufficient funds in your account to support your losses.

Losses are of course normal in the world of trading but a loss too large in margin trading can cause your account to get liquidated.

Liquidation means a total loss of all your funds due to your losses being too large. This can sometimes happen when you overleverage your position and take on too much risk.

If you notice that you get margin called very often it is a good practice to:

  1. Lower your leverage to match your investment style.
  2. Change market to reduce volatility.
  3. Decrease your position size to only lose a small amount of capital when liquidated.
  4. Always use isolated margin to prevent your whole account from getting liquidated.
  5. Make sure to use a stop-loss that is far away from your liquidation price.

Some traders can handle high-leverage trading in crypto while others find it very difficult and risky.

Now, margin calls are not the end of the world but they are a warning sign that you have taken on too much leverage and your account is at high risk. The good part is that you can prevent this from happening by following the advice above.

Go short or go long

Choosing a leveraged trading crypto product gives you the option to go both long and short in all the markets that are traded on the platform.

To go long means that you buy a digital currency and profits when prices rise. To go short means that you borrow coins from the broker, sell them to the marketplace, and then buy them back at a lower price for a profit.

Most traders are familiar with speculating on the long side of the market while many have never heard about the fact that you can make money in crypto in a declining market.

Short-selling a cryptocurrency can only be done on brokers and exchanges that offer leveraged contracts.

To bet on a falling market is seemingly more difficult and should be practiced with a smaller stake in the beginning.

While most investors buy cryptocurrencies and hold on to them for long-term gains, many day traders use margin platforms to benefit from short-term negative price movements.

This style of investing can be extra profitable during a crypto bear market.

What are the fees and commissions like

This is something that you should take notice of. Your fees are directly connected to the size of your position.

This means that if you increase your position size 15 times, the commissions will increase 15 times as well.

Let me demonstrate this with two examples, one without leverage, and one with.

Example 1:

  • Steve trades BTC/USD with a position size of $2000 and 0.15% commission.
  • His total commission is = $2000 x 0.0015% = $3

Example 2:

  • Steve trades BTC/USD $2000 on margin with 15x leverage.
  • His total commission is = $2000 x 15 x 0.0015% = $45

Here you can clearly see how the commission increased with the use of borrowed money. As the positions get bigger, the fees increase.

This can cause a lot of problems for new speculators that overleverage and bleed out due to high commissions.

Always read the fine print regarding the fees before you start or choose a crypto exchange with the lowest fees.

Where can you trade with margin?

The best option when it comes to choosing a platform is to pick a regulated operator that accepts your local currency.

There are of course unregulated off-shore exchanges that offer the same type of products but the security is not trustworthy.

There are only two types of operators that you should turn to that I have listed below:

  1. Crypto margin trading exchanges – These are operators that offer perpetual swaps contracts and inverse contracts under a regulated business name. The security is very high and the fees are generally pushed as low as possible.
  2. Crypto derivatives trading platforms – Derivatives trading offers different kinds of products such as futures and options which are a little bit different in the way the contract works. They are a little bit more complicated in nature and have an expiration date on the contracts.

Some trusted operators that we have previously reviewed on Trading Browser are:

Most of these brokers are regulated and they stand by good ambitions such as end-user protection, fair trading, and lower-than-average fee structures.

Benefits of margin trading

  • Increased profits – The biggest and most enticing fact about this style of investing is that you can make a lot more money in any single trade when you use borrowed funding. If you previously made around $50 – $250 consistently per profitable trade you can make 10 times, 30 times, or even 50 times that money in any position. This is not something made up. It is very common to see traders pull off days where they make several thousand in profits.
  • Enables traders with less capital – This is the second most important factor why investors choose to increase their buying power. It is well-known that most retail investors are lacking proper funding and with an account of less than $10.000 it’s going to be significantly more difficult to stay alive while speculating in the markets.
  • Promotes flexible strategies – It is a great option to leverage up your account to use several different strategies. Just increasing your purchasing power 10 times will give you the option to run different strategies in up to five markets or more.

There are several other reasons for choosing this type of investing but these are the most sought after.

Should you find yourself not making enough gains, having a small account, or just not being able to trade all the strategies that you want. Then margin trading in crypto might be just what you are looking for.

Know all the risks

  • Bigger losses – The big elephant in the room is of course the amount of cash you stand to lose if you misjudge the market or make the wrong call. A leveraged position loses much more money than a regular position and this is something that you have to get used to if you want to stay in this type of game. Control your losses with the position size, leverage, and stop-loss.
  • Difficult to understand – Many beginners find it difficult to understand all the moving parts such as margin capital, liquidation price, isolated or crossed margin, etc. These terms take some time to learn and they are going to be essential to your success so take your take to understand all the factors before you start with live money.
  • Liquidation – A liquidation means a total loss of all money in your account. This happens when your losses exceed our risk capital. If you get liquidated you need to take a step back and analyze what went wrong. Most of the time a trader will overleverage and overtrade due to greed.

These are the most prominent risk factors that you will face and I highly recommend that you master the platform before you start adding size to your trades.

Final reflections

This guide has been a full tutorial on margin trading in crypto. I have explained these topics:

  • What it is
  • How it works
  • Why it is important to new investors
  • Some popular strategies
  • Margin calls and liquidation
  • Going long and short
  • Fee structures
  • Pros and Cons

This will cover most of the basic knowledge that you need to succeed. As always, any style of investing requires hard work and dedication but if you really want to become a trader that makes the big bucks you need to grind it out with increased purchase power.