What is Bitcoin margin trading? How does Bitcoin margin trading work?
What is Bitcoin margin trading? How does Bitcoin margin trading work? Bitcoin is the first decentralized global digital currency in history. In addition, this means that it is completely computerized and does not exist in physical form. Bitcoin can be sent quickly and securely from any place on the Internet. You only need an Internet connection. The price of Bitcoin is determined by the free market and is affected by the relationship between supply and demand. Bitcoin is built on a decentralized network and is not subject to any central control, including but not limited to bank or government supervision. It relies on open source and peer-to-peer software and encryption technologies. This technology, called blockchain, is also completely transparent and unchangeable. Any change to it can only take place with the unanimous consent of the majority.
What is Bitcoin margin trading?
Simply put, Bitcoin margin trading allows leveraged trading positions to be established by borrowing funds from exchanges.
For example, if we open a Bitcoin deposit position with twice the leverage, and Bitcoin increases by 10%, our position will generate 20% profit due to twice the leverage. Without leverage, the return on investment is only 10%.
Margin leverage can also be 25 times or higher. Despite the risks, the same positions above will generate 250% (instead of 10% without leverage).
How does Bitcoin margin trading work?
In most cases, exchanges provide loans to traders so that they can expand their capital for margin trading. This allows traders to build positions with high leverage. The exchange does not have too much risk, because each position has its risk clearing price, which is based on the level of leverage.
How to short cryptocurrencies such as Bitcoin?
Want to gain benefits while the price of Bitcoin decreases? be on the cards. The short position of Bitcoin basically means that we believe that the price of Bitcoin will fall. Technically, the short position operates by selling the underlying assets first, in this case Bitcoin, and then buying. You don't have to worry; The exchange automatically completes this process for us.
The second role of shorting Bitcoin is to hedge options on cryptocurrency portfolios. For example, if the crypto portfolio contains 5 bitcoins and we want to hedge the risk that bitcoin may fall, we can establish a 10 times leveraged short position, which is equivalent to 40% of the bitcoin portfolio.
Opening a position requires only one tenth of its amount (10 times leverage). This means that we only need to hold 0.2 Bitcoin in the margin exchange, and we can hedge 40% of the portfolio worth 5 Bitcoin. Another advantage is that only a small amount is stored in the exchange itself. As you may have noticed, for security reasons, it is best to store as little data as possible in an encrypted exchange.
Margin trading tips
Because margin trading is risky, it is not recommended for novices to use password trading. We have collected some trading skills that must be read:
Always start with small transactions: first day margin trading? Then always start small. Get the necessary confidence before jumping into the turbulent deepwater of leveraged trading.
Don't bet all at once: Unless you are sure of your trading skills, you'd better divide your positions into several parts and create a price ladder. In this way, you can reduce the risk and the entry price of the position on average. So is profit taking. You can build a profit ladder.
Learn about fees and liquidation: Always know how much you paid and what type of fees you paid. Margin trading will incur ongoing costs to ensure that they do not eat up your profits. This also applies to clearing prices; You should know that number in case the position gets there.
Risk management: During margin trading, set clear risk management rules to guard against excessive greed. Consider the amount you are willing to risk and remember that it may be lost altogether. The most important thing is to set the stop loss level.
Price manipulation and short/long squeeze: In an unregulated market like Bitcoin, occasional short-term and long-term squeeze is not uncommon. When the number of short or long positions is high, this means that market drivers can easily make money when creating opposite price fluctuations, forcing these positions to close (and driving prices in that direction). The following figure describes a typical event of long extrusion followed by short extrusion. Classic manipulation of Bitcoin prices.
Short squeeze: the green candle marks the forced closing of short positions before falling
Short term transactions: Cryptocurrency is considered a very volatile asset. Margin trading in cryptocurrencies doubles the risk, or even more. Therefore, try to do short-term trading leverage position. In addition, although the daily fee or margin position may be negligible, the fee may be considerable in the long run.
Focus on fundamentals: Major events in the field of encryption, such as the decision of the Bitcoin Exchange Trading Fund and the regulations of the U.S. Securities and Exchange Commission, will have a significant impact on the price of Bitcoin. Although many traders rely only on technical analysis, remember that these events may have a significant impact on the encryption market.
Extreme fluctuation - Don't leave the screen: Crypto transactions sometimes have extreme fluctuations in both directions, resulting in candle wick. In this case, the risk is that the depth will touch our clearing value. It may occur where the leverage is relatively high, so the liquidation value is relatively close.
In fact, you can use these depths to try to set the closing target position, hoping that the depth will exceed them, leaving you considerable profits, and then returning to the previous price.
Cost and risk of encrypted margin trading
As mentioned above, the cost of the margin position includes the continuous interest paid on borrowed coins and the cost of opening the position at the exchange. As opportunities to earn more increase, so does the risk of losing more.
Our biggest loss is the amount we invested when opening positions. This level is called clearing price. The closing price is the automatic closing price of the exchange, so we will not lose any money lent to us, only our own money.
For example, if we are talking about standard trading, leverage 1:1, the clearing price is when the position reaches zero. With the increase of leverage, the closing value will be closer to our buying price. For example, if Bitcoin is worth $1000, we buy a Bitcoin (long) with a leverage of 2:1. The cost of our position is $1000. In addition, we borrowed 1000 dollars.
The liquidation price of our position will be slightly higher than $500 - because at this price, we lost just the first $1000, plus interest and expenses. Margin trading can also reverse the market, so we can also short with leverage.
High leverage risk: the higher the leverage, the closer the closing price. The rule here is to divide 100 by the leverage level to get your percentage until you reach the clearing price. For example, a positive number with a leverage ratio of 1:25 requires only a 4% change (100 divided by 25) to be liquidated. In the unstable password market, 4% can be realized quickly.
Now most exchanges can conduct margin trading. Leveraged trading has obvious advantages. Another significant advantage comes from security. Password traders should try to reduce the number of coins they hold on the exchange. Exchanges are considered to be popular targets of hackers. In recent years, several hacker attacks have occurred, including those of major exchanges.
Margin trading allows us to open leveraged positions without providing the required bitcoin; In this way, we can hold fewer coins in our foreign exchange account.
In general, the above content introduces in detail what Bitcoin margin trading is and how it works. In fact, Bitcoin margin trading allows the establishment of leveraged trading positions by borrowing funds from exchanges. Bitcoin is based on distributed ledger technology, which is commonly referred to as blockchain. It represents a block ledger, and each block contains all transactions in Bitcoin history.