Margin trading in cryptocurrencies is not something you can learn easily, and it involves various risks with every trade you make. In this article, I’d like to delve into this topic to provide you with a comprehensive understanding, reducing the uncertainty and risks associated with each trade, ultimately aiming for success.
Let’s start with the basics. You’re probably aware that there are various types of trading, and I want to focus specifically on margin trading because, in my opinion, it’s one of the best ways to profit.
First, let’s discuss the types of positions. In trading, there are long and short positions (buying and selling). Most cryptocurrency assets are known for their high volatility. Utilizing long and short positions allows traders to profit from price fluctuations.
When trading in long and short positions, it’s important to remember hedging — specific actions taken to protect against situations where the market moves in the opposite direction of your open positions.
Bulls vs. Bears
You’ve probably heard that the market can be bullish or bearish. I’d like to clarify these terms for you.
Market participants in the community are commonly referred to as bulls or bears, depending on their trading strategies. Those who bet on the price going up (opening long positions) are called “bulls,” while those who bet on the price going down, effectively shorting the market, are called “bears.”
Bulls use long positions, aiming to buy low and sell high. Their main goal is to identify undervalued assets that could potentially rise in the future and open a long position. When their expectations are met, and the cryptocurrency’s price increases, they close the trade, selling the asset. The difference between the lowest and highest price points represents the earnings of these bullish traders.
On the other hand, bears profit from market downturns. Their goal is to sell high and buy low. The trick to their strategy is selecting cryptocurrencies that are likely to decrease in value soon. This can be related to sanctions, hard forks, exchange hacks, and other news events. Unlike bulls, bears enter short positions, betting against the market. They enter the trade at the peak price, and the lower the price falls, the more profit they make.
What is Long?
A long position involves buying an asset with the expectation that its price will rise. Profit in a long position depends on the increase in the asset’s value. Long positions are the most popular type of trade among retail investors and are used in the spot market.
Longs imply that potential losses are limited. For example, if you bought an asset for $2,000, even if the company goes bankrupt, you would only lose $2,000, no more.
What is Short?
A short position involves selling securities, currencies, or commodities that the trader does not currently own but borrows from a broker.
Here’s an example: You plan to sell 1 BTC (Bitcoin) when its price reaches $30,000, expecting its price to fall in the next few days. You borrow Bitcoin from a broker and sell it for $30,000. A few days later, the price of BTC drops to $25,000. You buy Bitcoin for $25,000 and return it to the broker. Now you have made a profit of $5,000, minus transaction fees and any interest you owe the broker for borrowing the Bitcoin.
Risks of Short Trading
Trading in a short position is considered riskier than long trading for several reasons:
- – Margin Call Risk: Short trading requires traders to have a certain level of financial backing, or margin. If, against expectations, the price goes up and the trader’s account balance falls below the minimum margin requirement, the broker may forcibly close the position. This is known as a margin call. Unlike long positions, short traders don’t have the luxury of holding their position until better times.
- – Increased Loss Risk: Brokers charge fees for borrowing securities and other assets needed for short positions. When holding a short position overnight, the interest rate on short trades often increases, sometimes even doubling.
Features of a long position:
- 1. Suited for patient traders willing to wait for results over a longer period.
- 2. Excellent for beginners, as this strategy is more straightforward, involving “buy low, sell high.”
- 3. Doesn’t require complex analysis and can be used by traders copying others.
- 4. Accompanied by lower risks.
Features of a short position:
- 1. Suitable for those who prefer immediate profits from a trade.
- 2. An effective investment strategy.
- 3. Suitable for experienced traders capable of comprehensive market analysis.
- 4. Involves higher risk to your capital.
Based on my personal experience, I would recommend starting with a “bullish” strategy, which means opening long positions. By the way, I began trading with spot trading, choosing low leverage, as spot trading is less risky. Additionally, you can start trading with many exchanges that offer favorable conditions that suit you.
Exchanges with margin trading:
- – Bitfinex one of the oldest players, known for its advanced trading features and margin trading capabilities. Traders can short a wide range of cryptocurrencies on this platform, including Bitcoin, Ethereum, and other altcoins.
- – Kraken a well-established exchange known for its advanced trading features and margin trading opportunities. It offers various cryptocurrencies for short position margin trading and provides a user-friendly interface for managing short positions.
- – WhiteBIT is one of the innovative cryptocurrency exchanges that offers spot, fiat, and cross-margin trading services. It provides low fees and allows traders to use other assets as collateral for the margin balance, enabling a wide range of assets to secure all positions.
The margin trading in cryptocurrencies presents both opportunities and challenges for beginners. It’s a complex arena that requires a deep understanding of trading strategies and risk management. While the potential for profit is substantial, so too are the risks involved with each trade.
In the dynamic and volatile world of cryptocurrency trading, gaining proficiency takes time, practice, and continuous learning. Success in margin trading hinges not only on the ability to identify opportunities, but also on the discipline to manage risk effectively. As a beginner, it’s crucial to approach margin trading with caution, continuously expand your knowledge, and adapt your strategies to navigate this ever-evolving landscape.
Disclaimer: Please note that this content is not financial advice and is intended for informational purposes only. Additionally, before taking any actions, conduct your own research, relying only on secure source