24.07.2021

What are the features of cryptocurrency margin trading and what are its advantages?

There are several opportunities to enter the cryptocurrency market. Perhaps the most common and affordable options are spot and margin trading.

What is Spot Trading?

Spot trading is the most common form of trading (especially in the cryptocurrency space) and the most basic form of investment. Spot trading is the direct purchase or sale of assets such as commodities, stocks, bonds, or even currencies. All this also applies to cryptocurrency spot trading, except for the fact that there is a purchase or sale of cryptocurrencies such as Bitcoin, Ethereum, DOGE, etc.

In spot trading, market participants can instantly exchange cryptocurrencies by buying and selling them. As with purchasing physical items, buyers directly own the cryptocurrency they purchase. Exchanges that support spot trading, such as Binance, provide a platform where buyers and sellers negotiate prices and transact.

These transactions can be carried out at any time of the day and anywhere in the world, since crypto exchanges are always online. New entrants can buy on cryptocurrency exchanges for fiat currencies and even choose a price to enter a position.

What is margin trading?

Margin trading is another form of trading that looks more like asset speculation. Similar to spot trading, margin trading is about trading assets like bitcoin and relies on the use of leveraged funds to extract more value from future price changes in the underlying asset.

Because margin accounts allow users to borrow funds from third parties, leveraged users can gain or lose much larger amounts of seed capital. The borrowed funds are secured by other traders who receive interest based on market demand for margin funds.

To start margin trading, an investor must provide a collateral known as margin. Thus, if a trader plans to open a 10: 1 margin trade on $ 10,000, he needs to invest $ 1,000 as collateral.

Advantages and Disadvantages of Spot Trading

Spot trading is a fairly straightforward process, so the rules governing risks and rewards are much easier to understand. The benefits of spot trading are proportional to the risks: you can lose exactly as much assets as you buy. That is, if you buy $ 1,000 worth of BTC, you risk losing $ 1,000, but in the long run you have a chance to make a profit.

Spot trading is suitable for beginners. It allows them to stay in the market for longer periods of time, as they can simply invest and forget about trading for a while while the market goes on. In a spot trade, you can invest any amount, large or small, at the request of the investor.

The downside to spot trading is the potential profit margin, which, as you might have guessed, will always be inferior to the profit margin with alternative trading methods. Thanks to leverage, the potential profit in margin and futures trading is much higher than in spot trading.

In addition, the spot trade moves with the market. A downturn in the market leads to a decrease in the amount in your account, and an increase to it increases. That being said, working as a cryptocurrency spot trader can be quite stressful as cryptocurrency in general is quite volatile.

Advantages and Disadvantages of Margin Trading

To some extent, margin trading is similar to spot trading. However, the volatility inherent in the spot cryptocurrency market is only amplified here by leverage, which makes small investments more risky in terms of costs and profits.

If you are doing a margin trade on Binance, a potential drawback to keep in mind is the hourly interest rate applied to each trade. Costs may increase if you consider that as the margin level decreases, the position collateral must be increased (or leverage reduced). This is called a margin call. The higher the ratio, the faster the margin level can increase.

However, if margin trading is successful, high leverage ratios can help traders generate large returns relatively quickly. So, for example, trading with a leverage of 2x to 10x can increase the size of the return on the initial investment by almost two or ten times, respectively.

Probably more responsible use of margins is a good hedging tool for portfolio investments. Diversifying a portfolio with a hedged position can protect against major market downturns.

To protect against significant losses, margin trading should always be done using tools such as stop-limit orders.

How do I get started with Binance margin trading?

Trading margin on Binance is really easy. After creating your account, go through the identity verification (KYC) process and enable two-factor authentication (2FA). Now you can start trading:

  • Log in to the exchange account https://binance.com.
  • Click on the “Margin” button in the account balance information menu.
  • After carefully reading the Margin Account Opening Agreement, select “I Accept”.
  • You will then be able to transfer funds to your new Margin Wallet. For example, you can transfer BTC, ETH and BNB from an exchange wallet to a margin wallet. These funds will act as collateral for any leveraged funds involved in margin trading and determine how much you can borrow (fixed ratio of 5: 1).
  • Click “Borrow / Repay”, enter the amount you want to borrow, confirm the hourly interest rate and click “Confirm Loan”. Funds will be credited to your margin account (which can be checked under your balance / margin button). The balance sheet has a margin level gauge that correlates the level of risk with borrowed funds, the collateral you own, and market value. The margin level is calculated as follows: margin level = total assets / (total borrowed + total interest accrued).
  • If your margin level is declining, you need to either increase the amount of collateral or decrease the amount of the loan. At a margin level of 1.1, the position will be automatically liquidated. In other words, Binance will sell assets at market prices to repay the loan.
Summary

To make your choice, ask yourself why you are trading in cryptocurrency markets. Binance offers a wide range of tools and information for learning about cryptocurrencies. In any case, invest according to your goals, carefully choose methods and platforms for working with cryptocurrency.

The reliability of the site is primarily determined by the trading volume and the number of users. By all key metrics, Binance is the largest cryptocurrency exchange in the world. Binance also supports transfers in rubles from Visa / MasterCard bank cards and payment systems QIWI, Advcash, Payeer.

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