Margin trading enables traders to open short and long positions, considering they provide collateral. The collateral is a funds deposit that serves as a guarantee that the debt will be repaid. Margin trading is similar to credit leverage and practically increases a trader’s deposit by using a loan. In crypto, the coefficient may vary drastically, from 2:1 to 100:1 and higher.
Suppose everything goes according to the trader’s plan. In that case, their profit will increase proportionally to the leverage, and when the position is closed, the collateral and the fees will be paid back. Also, the remaining amount (trader’s actual profit) is deposited into the user’s account.
If a trader’s predictions are wrong, and the asset goes in the opposite direction than the trader predicted, the exchange will liquidate positions and repay the borrowed funds to the trader once the asset price matches the loan amount. Before the liquidation, the trader will receive a margin call, meaning a request for more collateral in order to avoid complete liquidation of the position.
Moreover, traders are free to close the unsuccessful trade themselves at any period before the liquidation without losing the entire position but only a part of it.
Longing and Shorting Cryptocurrency via Margin Trading
Longing crypto can be done by buying Bitcoin on the exchanges and selling it when the value rises. However, a more advanced and profitable way to long crypto is to use margin trading on an exchange.
When longing via margin trading, one will have to put up collateral to borrow money and use it to purchase more crypto. The advantage of margin trading for long trades is that they can be exceptionally profitable, however, it does come with a certain risk.
As for shorting crypto, margin trading is the easiest and most widely-used way to do it. Benefiting from both rising and falling prices makes shorting a more flexible strategy.