Trading has become a popular way for people to create an extra source of income as more and more people learn to day trade the markets. Given cryptocurrency’s high levels of volatility, trading cryptos can provide many opportunities to make profitable trades. In this article, we will look at one type of trading; margin trading, how it works, its pros and cons, and how you can do it with Binance Margin.
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
What is Margin Trading?
Margin trading in crypto involves borrowing funds from an exchange and using them to make a trade. Margin trading is also referred to as trading with leverage because it involves traders “leveraging up” their careers beyond the existing capital they have to work with.
How Does Crypto Margin Trading Work?
Venturing into the realm of crypto margin trading involves a strategic approach of leveraging borrowed funds to amplify trade volumes. However, a pivotal consideration that demands attention is the liquidation price—a critical safeguard woven into this intricate landscape. The liquidation price serves as a crucial threshold, determining when the exchange intervenes by automatically closing a position. This proactive measure occurs when the market aligns with the liquidation price, safeguarding traders from losing the borrowed funds and solely bearing the impact on their personal capital.
When engaging in trades solely funded by one's own resources, the liquidation price for a long position stands at zero. Nevertheless, as leverage escalates, the liquidation price ascends, drawing closer to the acquisition price—a dynamic that underscores the significance of vigilant risk management in this arena.
Margin trading extends a dualistic capacity for investors to forge both long and short positions, amplifying their repertoire of trading strategies. This ecosystem facilitates the potential for profit, irrespective of the market's directional sway. This versatile landscape accommodates both the endeavor to capitalize on price surges (long positions) and the speculative pursuit of profiting from price declines (short positions), a remarkable aspect that encapsulates the multifaceted essence of margin trading in the crypto realm.
How to Short Bitcoin and Other Cryptos
Seeking to capitalize on Bitcoin's downward trajectory? The prospect is indeed feasible through a strategic maneuver known as a short position. Effectively, a short position on Bitcoin entails a prognostication of an impending price descent. This intricate mechanism functions by initiating the process with the sale of the base asset, Bitcoin, followed by a subsequent repurchase. The orchestration of this process transpires seamlessly, facilitated by exchanges automating the intricacies on our behalf.
The utility of shorting Bitcoin extends beyond potential gains during price downturns. It serves as an adept instrument for portfolio hedging within the realm of cryptocurrencies. Imagine a crypto portfolio comprising 5 Bitcoins, harboring apprehensions regarding a potential Bitcoin slump. In this scenario, the initiation of a 10X leveraged short position emerges as an effective recourse. This maneuver effectively mirrors a substantial 40% of the Bitcoin portfolio, an action bolstered by the modest requirement of capital—a mere tenth of the sum (leveraged tenfold). Consequently, a mere 0.2 Bitcoin suffices to mitigate the risk posed to 40% of the portfolio, while simultaneously minimizing the sum stored within the exchange—a prudent practice that augments security considerations.
The allure of this approach resides not only in its strategic acumen but also in its alignment with optimal security paradigms—reducing the exposure of assets within crypto exchanges to the bare essentials.
Margin Trading Tips
Start trading with small amounts.
If it’s your first day trying out margin trading, it may be best to start small. Get the necessary confidence before jumping into the deep raging water of leveraged trading.
Don’t rush to go all-in.
Unless you’re sure about your trading skills, dividing your position into portions and creating a ladder of prices is better. This way, you can reduce the risk while averaging down the entry price of the work. The same can be said for taking a profit. You can set up a ladder of take-profit levels.
Get familiar with fees and liquidations.
Always know how much you are paying and what type of fees you are paying. Trading on margin carries ongoing expenses, so ensure they don’t eat away at your profit. The same is true for the liquidation price; it is essential to know that number in case the position reaches there.
When margin trading, set clear risk management rules and beware of excessive greed. Consider the amount you are willing to risk, keeping in mind that you can lose it entirely. Set levels for closing positions, taking profit levels, and the most important - set up stop-loss levels.
Price manipulations and short/long squeeze
In an unregulated market like Bitcoin, it’s not rare to see occasional short and long squeezes. When the number of short or long positions is high, a market mover can make easy money when creating an opposing price move, forcing those positions to liquidate (and push the price even more in that direction).
Cryptocurrencies are considered to be very volatile assets. Margin trading of crypto currencies doubles the risk even more. Therefore, try to make short-term trading leveraged positions. Moreover, although the daily fees or margin position is negligible, the prices can amount to a significant sum in the long term.
Pay attention to fundamentals.
Major events surrounding the crypto space, like Bitcoin ETF decisions, SEC regulations, and so on, can significantly affect the price of Bitcoin. Even though many traders rely only on technical analysis, remember that those events might have a critical impact on the crypto market.
Beware of extreme volatility.
Crypto trading sometimes has extreme fluctuations in both directions, creating candle wicks. The risk, in this case, is that the deep will touch our liquidation value. It could happen where the leverage is relatively high, so the liquidation value is close.
You can take advantage of these deeps and try to set closing target positions, hoping the deep will run over them, leaving you with a decent profit and then going back to the previous price.
Binance Margin Trading Guide
How to open a Margin Trading account on Binance
After logging in to your Binance account, move your mouse to the top right corner and hover over your profile icon. This will be different for everyone and will show the first two characters of your email address. When the dropdown opens, click on your email to go to your account dashboard.
You will now be on your account dashboard. You can see your account balances on this page. Below “Balance Details”, click on “Margin” to begin the process of opening your margin trading account on Binance. You will need to have completed identity verification (KYC) and make sure your country is not on the blacklist. It is also mandatory that you enable 2FA.
Next, you will see a pop-out window about the margin trading quiz. Please complete it and, if you are willing to proceed, click on the “Start the Quiz” button.
How to transfer funds
After activating your margin account, you will be able to transfer funds from your regular Binance Wallet to your Margin Trading Wallet. To do so, click on the “Wallet” tab, select “Margin” and click on the “Transfer” button on the right side of the page.
Next, select which coin you wish to transfer. In this case, we will use the BNB.
Input the amount you want to transfer from your Exchange Wallet to your Margin Wallet and click “Confirm transfer.”
How to borrow funds
After transferring BNB coins to your Margin Wallet, you will be able to use those coins as collateral to borrow funds. Your Margin Wallet balance determines the amount of funds you can borrow, following a fixed rate of 5:1 (5x). So if you have 1 BTC, you can borrow 4 more. In this example, we will borrow 0.02 BTC.
After selecting the coin you wish to borrow and the amount, click “Confirm Borrow.”
Next, your margin account will be credited with the Bitcoin you borrowed. You will now be able to trade the borrowed funds while having a debt of BTC plus the interest rate. The interest rate is updated every 1 hour. You can check the currently available pairs as well as their rates on the Margin Fee page.
You can check your current margin account status by going to your “Wallet Balance” page and selecting the “Margin” tab.
The Margin Level
On the right side of the screen, you will see your margin level, which gives you a risk level according to the borrowed funds (Total Debt) and to the funds you hold as collateral on your margin account (Account Equity).
The risk level changes according to the market movements, so if the prices move against your prediction, your assets can be liquidated. Note that in case you are liquidated, you will be charged extra fees.
The formula to calculate the margin level is:
Margin Level = Total Asset Value / (Total Borrowed + Total Accrued Interest)
If your margin level drops to 1.3, you will receive a Margin Call, which is a reminder that you should either increase your collateral (by depositing more funds) or reduce your loan (by repaying what you’ve borrowed).
If your margin level drops to 1.1, your assets will be automatically liquidated, meaning that Binance will sell your funds at market price to repay the loan.
Click on “Positions” to check detailed information about your current positions. If you prefer to see the values in USDT, select “USDT Benchmark” on the right side.
How to trade on margin
If you wish to use your borrowed funds to trade, you can go to the Margin page, and trade normally using Stop-Limit and OCO orders.
How to repay your debt
To repay your debt, click on the “Borrow/Repay” button and select the “Repay” tab.
The total amount to be paid is the sum of the total borrowed plus the interest rates. Make sure you have the required balance before proceeding.
When you are ready, select the coin and amount you wish to repay, and click “Confirm repayment.” Note that you can only use the same cryptocurrency to make the repayment.
Moving funds back
If you wish to move your funds back from the Margin Wallet to your regular Binance Wallet, click on “Transfer” and use the button in-between the two wallets to change the direction of the transfer. Next, select the coin and amount and click “Confirm.”
You can move your funds freely from one wallet to another, without any fees. But note that if you currently have assets borrowed, your risk level will increase as the funds of your Margin Wallet decrease. If your Risk Level gets too high, there is a chance of your assets being liquidated. So make sure you understand how margin trading works before using it.
Binance Margin: An example
Satoshi believes the price of BNB will go up, so he wants to open a leveraged long position on BNB. To do so, he first transfers funds to his Margin Wallet and then borrows BTC. Next, Satoshi uses the borrowed BTC to buy BNB.
If the price of BNB goes up as Satoshi expected, he can sell his assets and repay the borrowed BTC along with the corresponding interest. Any leftover for that trade will represent his profits.
However, margin trading can amplify both the gains and the losses. So if the market moves against Satoshi's position, he will have bigger losses.
Advantages of Margin Trading
Increased Buying Power
The most apparent benefit of margin trading is that it increases an investor’s buying power. If your brokerage lets you use the most significant margin allowed by law, it effectively doubles your buying power.
For example, an investor with $50,000 could buy as much as $100,000 worth of securities by using margin, allowing investors to make much larger purchases than they have the capital to make.
High Potential Returns
Increased buying power allows you to buy more securities than you could otherwise afford. The more guarantees you own, the greater your potential profit if those securities gain value.
If you buy 100 shares in a company at $50 each, you would have spent $5,000 on the shares. If those shares increase in value by 5%, you will make $250 if you sell those shares.
By trading on margin, you could buy as many as 200 shares instead of just 100. If those shares experience the same 5% gain, your gains will be $500 instead of $250, increasing your percentage return as well. You made $500 on an initial investment of $5,000, meaning the gain on the money you invested was 10% when the share price rose by only 5%.
Margin gives investors more buying power, which means they can purchase more foreign securities, such as stocks and bonds, in their portfolios.
For investors who don’t want to use mutual funds or ETFs, it can be challenging to build a diversified portfolio, especially if you don’t have much money to invest.
Margin can increase the money you can use to buy stocks and bonds, making it easier to spread your investments out and purchase various securities, diversifying your portfolio.
Disadvantages of Margin Trading
Borrowing money for almost any purpose is risky. You have to pay back the loan eventually.
Borrowing money to invest is doubly risky. There’s no guarantee that an investment will succeed. Whether the securities you buy gain or lose value, you will have to pay back the borrowed amount.
If you use margin to buy stocks that fall in price, you will lose more money than you would have lost if you didn’t use margin. In some cases, you could lose more money than was put into your portfolio.
For example, say you buy stock worth $20,000. You use $10,000 of your own money to pay for the purchase and $10,000 of margin. If the shares lose 75% of their value, you’ll only be able to get $5,000 if you sell them.
You will have to use that $5,000 to repay some of the margin loans and will need to come up with the remaining $5,000 to pay the debt some other way.
Borrowing money isn’t free. Almost every loan means paying interest, and margin trading are no different. When you use margin to invest, you have to pay interest based on the amount of money you’re borrowing.
Each brokerage can set its margin interest rates. Some charge the same rates regardless of how much you borrow, while others adjust the pace as you borrow more — often lowering the speed the more you borrow.
Investors need to account for the cost of borrowing money to invest on margin before lending money. The interest charges reduce gains on successful investments and increase losses from poor-performing investments.
Even if the shares you buy maintain their value, the cost of borrowing money can lead to you losing money.
Brokerages that offer margin usually have two margin requirements: one for opening a new position and one for maintaining a current situation.
For example, a brokerage may let you open a new position with a 50% margin. Effectively, you can borrow the amount of money you’ve put into your portfolio so that half of the purchase comes from your funds and half is borrowed from the brokerage.
Once you open a position by buying shares, the portfolio has to maintain enough value to meet the brokerage’s maintenance margin requirement.
Binance Margin: Conclusion
Margin trading allows a trader to open trade positions bigger than they can with the amount of capital they currently have available for trading, it can be risky and beneficial for the trader, depending on whether or not the markets agree with their open positions, with that in mind, if there's one great place to do it, it's on Binance Margin, so, if you're confident about trying it, you can follow the link below and start using it today.