You can go about trading cryptocurrencies in two ways: by buying them directly, or through a derivative like a CFD. Forex brokers and other similar platforms that are commonly used by traders, charge high commissions, rollover fees, and have large spreads, which is why people flock to the traditional approach.
The key distinction between the traditional approach in which you actually buy the cryptocurrency and you are storing it in your wallet until deciding to sell it on the exchange, and the derivative based trading is that you don’t have leverage and you cannot trade on margin.
In this article, we are going to discuss the benefits and the risks associated with both, but first, let’s explain what is margin trading in order for you to better understand why is something considered an advantage or why it carries the inherent risk.
What is margin trading?
Trading on margin means that you can borrow funds from the broker/dealer in order to maximize your profits. The idea behind it is simple. If you had the confidence that the price of Bitcoin is going up and you only have a $1,000 but you would like to invest more you can increase your investment size by borrowing money.
Your investment size in relation to the amount of borrowed funds is what is known as leverage. Leverage is expressed in a ratio where 1:3 leverage means that you have borrowed three times of your investment amount, which is, in this case, $3,000 and with your $1,000 you can now enter a $4,000 position instead of just $1,000.
In this case, your $1,000 is a margin, which serves as collateral for the opened position, thus the name margin trading.
So let’s say you have opened a long position in Bitcoin for $4,000 from which $1,000 are your own (margin) and $3,000 are from the broker (leverage). Your analysis was good and in the course of a couple of days, the price goes up by 25%. You decided to close your position and take that 25% profit. But with the power of margin trading that profit isn’t 25% its 100% on your investment amount. $4,000*25/100%=$1,000 so you balance would say $5,000. If you return the funds (which happens automatically when closing the position), you are left off with $2,000 which is double the amount you’ve started out with instead of profiting only by $250 if you were to invest directly by buying the asset and then selling it later on the exchange.
But what if the price goes against you?
Margin trading if not well informed can serve as a double-edged sword it can magnify the gains but it can magnify the loses as well. The broker/dealer or a cryptocurrency exchange that does have a margin account will close automatically your position if the value of your assets falls more than the margin amount so you are able to cover the expanse of the made loss plus some minor fees.
In this particular example where you start off with $1,000 with a 1:3 leverage and your trade went against you by 25% you would receive a margin call as you made a loss of $1,000 and your margin is $1,000.
If you don’t replenish your account, informing the broker/dealer that you are ready to stake further capital your positions will be automatically closed, but the choice in itself is referred to as a margin call.
You can prevent this from happening you can close your position a lot sooner setting your limit at a loss of for example only 10% of your margin. In that way, you are only risking 10% of your capital for a profit potential of 100% which makes for a good risk to reward ratio.
The other advantage of margin trading is that you can make money while the prices are falling by short-selling the asset which is impossible with the traditional approach where you buy the cryptocurrency on the exchange directly.
The only thing that you can do in a bear market when trading on the exchange is buying a stablecoin like Tether which also proved to be not so stable recently when the price dipped below $0.96.
Short selling lets you basically sell on the opening of your position when the price of Bitcoin is $7,000 and buying at the closing of your position at a cheaper price for $6,300 per Bitcoin, in which case you would have gained 700$. This is only possible with margin trading because in order for this to work the process of borrowing is necessary.
Now that you understand what margin trading is and how can it benefit you and lets you in control of your risk management, we are going to discuss the current problems that the cryptocurrency trading industry faces in an inability to integrate this trading technology properly.
Currently, there are extremely limited opportunities for margin trading among the cryptocurrency exchanges. Most don’t support it at all, and those that do have poor execution mechanisms and some even require you to stay online, meaning if your internet connection breaks just for a second your funds are lost.
Even if there aren’t any technical difficulties you are lucky if you find more than 1:3 leverage. They require long “know your customer” (KYC) procedures and make the depositing and withdrawal take days which can be a very long time in the crypto world, causing you to miss a great trading opportunity.
The other key problem with the traditional cryptocurrency exchange trading is that you aren’t capable of performing your basic risk management and profit taking automatically. Trough a limit sell order you can only preset one of the mentioned levels, which exposes you either of more risk or loss in a form of not taking the profit on time.
«Think yourself: 99 percent of crypto-exchanges do not have functionality for both simple and technical analysis, it is impossible to put stop-losses on them, but there are big buttons “buy” and “sell”. For any more or less experienced trader at first glance, it will be clear that it is not necessary to communicate with such sites, because it is not so much an exchange as a casino, where nothing depends on the actions of a player by and large» Larson Holz IT Ltd, the head of control and audit-Alexander Smirnov.
Among those that are strictly related to trading, there are other problems associated with trading on the cryptocurrency exchange related to liquidity or the possibility of it being hacked and having your funds lost, or for example in times of high volatility people flock to their exchanges to take action causing a massive traffic overload so your orders cannot be executed.
Cryptocurrency trading has been limited by two approaches — margin trading through a broker with fiat money, paying high commissions and fees, and trading directly by buying them on the cryptocurrency exchange risking your funds being lost and not being able to profit in the bear market which is lasting for over ten months.
Cryptocurrency trading choice isn’t going to be limited by two options anymore as the new cryptocurrency trading platform PrimeXBT is set to bring the best from both worlds.
The unique features of the exchange will provide you with the highest possible level of profit and allow you to trade comfortably:
- In order to solve the liquidity issue, PrimeXBT has an effective liquidity aggregator working with 12 exchanges, providing you with fast order execution at any volume.
- Remember the example for margin trading in which you have turned your profit into100% instead of only 25% using 1:3 leverage? Well Prime XBT will introduce margin trading with up to 1:100 leverage! That means more profit potential for the experienced traders as that means that you can open a $10,000 position with only $100. This solves a problem of low leverage options commonly seen in today’s crypto trading industry and one even bigger problem which is being able to short-sell and make money while the prices are declining.
- Complete control over your positions as the PrimeXBT exchange, unlike most other. exchanges, allows you to set a “stop-loss” order limiting your loss potential with simultaneously increasing your profit potential with high leverage options on the other side.
- All of the major cryptocurrencies like BTC, ETH, LTC, BCH, EOS will be listed from the very start and others will be listed later.
- No KYC procedures as the registration procedure take no more than 40 seconds. No long withdrawal and deposit periods, you are able to trade incognito without having to go to the bank every time you want to open a position.
With solutions like these Prime XBT enables you to protect your cryptocurrency holdings against market volatility by hedging or in the current bear market making your profits. With the user-friendly yet advanced interface, the platform will appeal to both professional traders and beginners alike.
With offices in San Francisco and London, PrimeXBT is able to service clients around the world in a timely manner if some assistance is needed and for your convenience, they have developed an application so you can track the market and take some action if the market conditions change and you are away from your office.
In order to promote the launch, they have prepared significant bonuses for the first customers. More information will be announced in the near future so make sure to subscribe to the newsletter on PrimeXBT website.