Crypto Margin Trading is a form of trading that can quickly amplify profits. It is widely used by traders to buy and sell Bitcoin, Altcoin, and others. However, do you fully understand the basic terminology in Margin Trading? If not, check out the article below to gain a better understanding of this form of trading.
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What is Crypto Margin Trading?
What is Margin Trading in cryptocurrency?
Margin Trading, once a term predominantly associated with the stock market, has gained wider recognition with the growth of cryptocurrencies. To engage in Margin Trading, an initial deposit of collateral money, also referred to as margin money, is required. Different exchanges offer varying levels of Margin leverage, typically ranging from x3 to x10. Additionally, Margin Trading involves the payment of daily interest, the rate of which depends on the borrowed amount.
Example: The current price of Bitcoin is $50,000 and you have only $5,000 in your wallet. If you buy Bitcoin at the regular price, you can only purchase 0.1 BTC, but if you use x10 Margin, you can completely buy 1 BTC for only $5,000.
Basic Terminology in Margin Trading for Cryptocurrency
To trade margin effectively, you must understand these terms:
Trade: The act of buying or selling – Trader: a person who trades.
Position: This is the most fundamental term in Margin Trading, and there are two main positions:
- Long Position: You will make a profit when the market goes up.
- Short Position: Opposite of Long Position, you will make money when the market goes down. This means if you predict that the market for a particular coin is going to decrease, placing a Short Position will be profitable.
- Long – Buy low, sell high.
- Short – Sell high, buy back low.
For both types of positions, the profit earned is equal to the selling price minus the buying price. Additionally, you must pay a borrowing fee for cryptos or cash, which is the Funding fee.
Leverage: This is selecting the desired level of leverage. If you have a capital of 500 USD in your Margin wallet and choose a leverage of x5, it means you will be able to trade with a capital of 2,500 USD.
Liquidation Price: This is one of the fundamental terms in Margin Trading that investors dread most. When you place an order, the system will establish a liquidation price, which depends on the amount of money and the level of leverage each investor uses. When the price reaches this level, your losses will typically represent 95 – 100% of your original capital (the margin or deposit put down).
Margin Account: This is the amount of assets that the exchange temporarily holds when you open a Position.
Exchange Account: This is the standard trading account for investors.
Lending Account: This type of account is for lending, where you can earn interest from those who borrow from it.
Maintenance Balance: This term refers to the percentage % of assets allowed in order not to have the position liquidated. The remaining balance of that order must be higher than the maintenance margin percentage. (For example, on Poloniex, the remaining balance must be higher than 20%, on Bitfinex > 15%, etc.)
Required Equity: Similar to Maintenance Balance, this is the mandatory margin amount that helps prevent the account from being liquidated. However, the difference is that Required Equity is represented by a specific number rather than a percentage.
Liquidation – Abbreviated as Liq, slang term: Account burnout: This order is executed when your losses exceed the allowed limit. That is, when the price of the coin reaches the Liquidation price fee mentioned above.
For example, Poloniex will liquidate your position when losses exceed 80%, at which point the system will automatically liquidate at the current market price and return the excess money to your wallet. Amount: The amount of currency you are buying/selling on the market.
Est. Liquidation Price (LIQ Price): Estimated liquidation price of the ongoing position.
Margin Call: Speaking of fundamental terms in Margin Trading, everyone knows Margin Call. This is a margin call when your position is close to liquidation, and you will receive a message on your phone/email reminding you, so you can decide to cut losses or add more funds, raising the liquidation value higher.
Base Price: This is the entry price, which helps you estimate the break-even point when closing the position.
Unrealized P/L: This term helps estimate the total profit or loss across all open positions at the current moment if you were to close all positions right now (P = Profit, L = Loss).
Unrealized Lending Fees (P/L fee/Funding Cost): The estimated total amount of interest you are currently incurring across all open positions.
Net Value: This term refers to the total collateral value when placing an order, which includes: Total margin value, unrealized P/L, and Unrealized Lending Fees.
Kill Margin / Kill Short / Kill Long: This is also a basic term often mentioned in Margin Trading. Simply put, it is a form of market manipulation, where ‘whales’ who hold a large amount of a coin deliberately push the price up to liquidate those who are shorting, known as Kill Short. Conversely, when ‘whales’ sell off large amounts of assets causing the market to drop rapidly, it liquidates those who are in long positions, known as Kill Long. Generally, this market manipulation activity is collectively referred to as Kill Margin.
Total Borrowed Value: The total value that you have borrowed.
Total Margin Value: The total value of the margin, including Bitcoin and other currencies. Everything will be calculated based on the current value of Bitcoin.
Initial Margin: This is the initial margin level, which will be calculated as a percentage % of the Net Value over the Total Borrowed Value.
Example: If you want to borrow 6 BTC, then your margin must reach 40% of 6 BTC ~ 2.4 BTC in the Margin account.
Maintenance Margin: The maintenance margin level needed to avoid forced liquidation of the account.
Current Margin: Reflects the current level of margin.
What is Pros and Cons of Crypto Margin Trading?
Besides understanding the basic terms in Margin Trading, you should also be aware of the benefits and risks involved in this type of trading. They are as follows:
Advantages of participating in Margin Trading in cryptocurrency:
- It helps to quickly increase profits from small market fluctuations.
- Diversifies the investment portfolio with a small amount of capital.
- You can earn profits even when the market is declining.
Disadvantages of Margin Trading in cryptocurrency:
- While the profits can be large, it also means that you will face high risks.
- Requires technical skills and experience; otherwise, it’s very easy to get wiped out.
- Difficult to control greed, psychology, and emotions.
Experience in Crypto Margin Trading
How to effectively engage in Crypto Margin Trading? This is a topic of great interest to many traders, and if you are new, you must remember the following skills:
- Always have a pre-defined trading plan and strictly adhere to the discipline of that prior plan. For example: entry points, profit-taking points, stop losses, etc.
- Avoid being overly greedy by using too high leverage. A safe way to Trade Margin for beginners is to use deals of x2, x3, x5, or at most x10 if the winning ratio is >50%.
- Use stop-loss orders to foster better discipline. Because holding on to losses is the biggest reason why accounts get burned quickly.
- With high leverage, you should not use the DCA (Dollar Cost Averaging) strategy.
- When playing Margin, you should use your own funds, rather than borrowing, to create the most comfortable psychology when entering trades.
- Don’t put all your eggs in one basket, diversify into different investment portfolios.
- As a newcomer, learn to Trade by yourself with small capital to understand the essence, before using a large sum of money for Trading.
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With the useful information above, I hope that you will grasp the basic terms in Margin Trading for cryptocurrency so that you can master the trading process. And if you have any questions, leave a comment below the article, to get advice from the team of experts at invest286.com.
