In this article, I will explain what Margin Trading means, how does it work, and present some key elements associated with it, such as long and short positions, or margin funding.
What is Margin Trading?
Margin trading refers to using borrowed capital from a broker in order to make an investment, such as investing into crypto.
Now it is more popular than ever since, unlike regular trading, margin trading lets you have access to a large sum of money and leverage your position.
Basically, margin trading offers you the chance of recording larger profits from successful trades – at the same time, though, the potential for loss is also higher.
How Does Margin Trading Work?
To put it as simply as possible, a trader has to offer an initial deposit in order to open a position – this is known as an initial margin.
The trader needs to have an account with a particular amount of capital in order to keep the position. In the case of crypto exchange, the amount of capital deposited is used as collateral by the exchange platform.
The amount that a trader can use for leveraging when it comes to margin trading is determined by the platform used for trading and the initial deposit made.
Leveraging offers you more buying power as it lets you explore larger positions compared to using only the money you have in your account. Leverage is normally described as a ratio, like 1:10 or 1:30.
What Are Long and Short Positions?
We’ve mentioned open positions, but what are they really?
Usually, in crypto margin trading, you can benefit from two options: going short or going long.
In the case of long positions, the trader will anticipate the increase in price of a crypto asset. Short positions represent the opposite, in which the trader anticipates the decrease of the price of a crypto asset. Short positions are generally used by traders who want to register profits from failing cryptos.
What Is Margin Funding?
If you think that margin trading is too risky for you, there is a second option that involves making a profit from the leveraged trading methods, called margin funding.
In margin funding, you are allowed to commit your money to fund the margin trades of other users.
In the case that a trader accepts the terms presented and agrees to the offer, the provider of the funds can receive repayment of the loan using the agreed-upon interest.
The actual mechanism may vary from exchange to exchange, but that is the main idea, and it is one that some find appealing as it is considered less risky than margin trading.