How Can You Profit from Bitcoin Margin Trading?

How Can You Profit from Bitcoin Margin Trading and When to Stop

Bitcoin margin trading carries significant risks. While you can increase your wealth exponentially, you can also lose your capital in the matter of a few trades.

Trading in the cryptocurrency space has seen an exponential rise in the last year. The price of bitcoin and other digital currencies sky-rocketed since March 2020 as this highly disruptive industry has attracted institutional investors including Tesla, Square, and MasterCard.

However, the crypto space continues to remain volatile providing day traders enough opportunities to leverage margin trading and make a quick buck. Here, we look at a few strategies that can be useful when it comes to bitcoin margin trading.

Bitcoin margin trading is rising in popularity

As bitcoin is rapidly gaining in popularity, several exchanges are now offering margin trading solutions to enthusiasts. This strategy allows traders to borrow additional funds and take a larger position. So how does bitcoin margin trading work and what are its advantages or disadvantages?

Bitcoin margin trading allows traders to derive augmented gains and benefit from market swings. This trading strategy is a bit more complex and advanced as you traders can borrow funds and leverage their position to go long or short on a particular cryptocurrency.

For example, Kraken allows you leverage of up to 5x of your total capital. So, in case you have $1,000 dollars in your trading account you can have five times (or $5,000) the earnings potential compared to a traditional spot trade.

While trading on a margin you will have to fulfil certain obligations. This includes the payment of margin fees as well as maintaining a minimum balance in your account as a collateral. Traders will need to return the minimum amount of the margin extension to the exchange within a certain time period either via settlement or a closing transaction.

High risk and high returns

Margin trading is a hugely popular concept and is accepted in the traditional finance sector as well. You can leverage your position to buy stocks and even while trading in the foreign exchange space.

You should note that margin trading carries significant risks and you can lose 100% of your invested capital within a few trading sessions.

It is advisable to have plenty of day trading experience before you take on a leveraged position. Traders need to ensure they follow a disciplined approach that will protect them against sudden fluctuations in the value of these crypto-assets.

When you begin margin trading, you need to start with a small position to test the waters and avoid mistakes. There are a few exchanges that allow traders to take a highly leveraged position which increases risks by a huge margin. In the case of altcoins and lesser-known tokens, these risks are exacerbated as the liquidity is lower and volatility might be higher.

It's also important to understand that margin trading should be viewed as a short-term strategy due to the rapid fluctuations in the prices of bitcoin and other cryptocurrencies.

Traders need to allocate a small amount of their crypto capital towards margin trading. It is also essential to set stop-loss limits that will allow you to exit your position if prices spiral downwards.

Trading is not easy and theoretically there is a 50% chance of you losing your money in each trading session. That’s why it is extremely essential to set a stop-loss order when you begin trading in any asset class.

According to Investopedia, “A stop-loss order is placed with a broker to sell securities when they reach a specific price.”

However, it might be difficult to determine the appropriate stop-loss level. In case you have a stop-loss order 30% below your purchase price, you might lose a significant portion of your capital if markets turn ugly. Alternatively, if you just have a stop-loss limit of 3% you might get out of your spot position too quickly.

The stop-loss limit should be placed according to your risk threshold. It is a very useful strategy for traders as it helps to minimize your losses and reduce cash burn.

As margin trading involves borrowing money, traders may have to go through a verification process where exchanges will authenticate your ability to make the necessary repayments. A few regions have also imposed limits on the borrowing ratio. For example, the leverage ratio is capped at 2:1 for digital currencies in Europe.

The final takeaway

Before you take a plunge into margin trading with Bitcoin, you need to consider a significant number of aspects including the interest rates. You need to enter into long or short positions over a period of time rather than placing orders all at once. This will help you lower overall risk and allow you to make the required adjustments if market sentiment turns against you.

You should take advantage of multiple technical trading tools and pay attention to the relevant indicators. When you trade on a margin you need to follow market movements closely unlike passive investing. It's imperative to monitor your trades closely and cut your losses if markets turn ugly.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes