What is margin trading

The essence is the provision of borrowed funds by the broker, which the trader can put into business. It is similar to a loan for the purchase of a certain financial product. There is another name for margin trading – leveraged trades.

Leverage is the ratio of own funds to the total value of the asset. For example, if it is 1/2, then the share of trader’s money in the deal is equal to 50% – the rest is allocated by the broker with the participation of dealing centers. When it comes to cryptocurrencies, leverage can reach 1/10, 1/20, 1/50, etc. There are platforms that offer up to 1/1000, which means you can make a deal that is a thousand times the capital in value.

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The main condition for making a deal is the presence of own funds at the trader. Without them and registration in the system with verification (KYC), the loan will be refused.

Advantages of margin trading

The main advantage, it is also the most obvious: with the right strategy and understanding of cryptocurrency market movements, you can achieve excellent profitability even with a small initial capital. The greater the leverage offered by the broker, the more substantial the profit.

Other pros of the solution:

• At first glance, the method may seem quite risky, but investors are actually in a pretty secure position. Since margin trading is primarily used for highly liquid first-tier assets. There is no need for a broker to take a risk and offer leverage when it comes to obscure tokens.
• Nobody forbids to allocate assets within the portfolio. In this way, security is increased and investments become more reliable. The probability that the market will collapse simultaneously in all directions is extremely low. Diversification in case of margin trading has not been canceled.
• The leverage equalizes traders with small capital and professionals. It opens the door to serious deals and large volumes.

Specialists note that in the presence of a well-tested strategy with a positive overall result, margin trading is a chance to dramatically increase your profits without additional financial injections.

Disadvantages of margin trading

There is no perfect solution, any promising directions have pitfalls that cannot be ignored. In the case of margin trading, it is worth noting the following disadvantages:

• The higher the potential profit, the more tangible the risk of losing all the funds. The prospect of parting with all the capital in margin trading is more real than when working with your own assets. If you do not use leverage, there is always a chance to save at least part of your funds.
• There is a probability that a trader will not only lose money, but will remain indebted to the broker. This is possible when the leverage is too high, the forecasts did not come true, and the position was not closed in time. Yesterday there was some capital, and today there are only debts.
• Not every asset is available for margin trading. Moreover, the list of cryptocurrencies and the size of leverage is determined by the broker himself, and he can change the conditions at his discretion depending on the market situation. Investors are most often deprived of potential profits by such manipulations.
• The commission will have to be paid in any case, even in case of unsuccessful investments.
• Trading is possible only in one direction – either up or down. “Narrow throat” limits the possibilities when trading.

The main rule: it is impossible to trade for amounts that a trader is not morally ready to lose. It is also worth to always increase the level of knowledge about the market and follow your own developed strategy. Only then risks can be leveled.

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On cryptocurrency exchanges you can earn much more than on the stock or currency market, but the risk of losing the invested money is also greater.

Define your goals

What do you want to do on the exchange – trading or investing?

Crypto exchanges are divided into centralized and decentralized exchanges.

A centralized exchange operates as an online service and controls the personal accounts of all users, often there is a requirement for identity verification. Centralized exchanges have obligations to traders and investors to pay profits on transactions with trading deposit (trading deposit is a certain amount of money that a trader deposits into his own trading account), but exchanges also charge commission for transactions.

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The most well-known and largest centralized crypto exchanges that traders who have decided to get into crypto trading can look at are Binance and FTX.

Decentralized exchanges are technical platforms operating on the blockchain, they only allow direct transactions between participants. In this case, your personal data and assets are not stored anywhere and are not tied to anything. Some of the most popular in the crypto world are Uniswap, PancakeSwap, and Compound.

Decentralized crypto exchanges have no controlling and verifying body in the form of administration. And here there is a higher risk to run into fraudsters: to buy a fake smart contract – even bitcoin is being counterfeited (smart contract is a computer protocol that allows to conduct transactions and controls their execution with the help of mathematical algorithms), or to invest in a dubious coin, which may be a fake project. In both cases, the investor loses money and “drains” the trading deposit.

However, here you can find a new interesting cryptoasset, which after some time may take off and will be recognized by centralized platforms, buy it at the start and earn good money.

For trading, especially for novice traders, you can pay attention to centralized platforms, and for investments you can consider both centralized and decentralized.

Important criteria for choosing a crypto exchange

When choosing an exchange for cryptocurrency trading, you need to consider the following factors:

The size of the exchange

The size of the exchange directly affects its reliability: the larger the exchange in terms of trading volume, the more users trading on it, the more stable it is. The financial stability of an exchange determines its ability to fulfill its deposit payment obligations to you. The financial stability of an exchange is influenced by several factors: the number of registered users, the amount of funds deposited by clients on the exchange, the total trading turnover, and how long the exchange has been operating on the market.

If the exchange takes a long time to pay out deposits (for example, more than a day), it may indicate financial instability of the exchange. Large, stable exchanges withdraw funds, as a rule, almost instantly.

Jurisdiction of the exchange

The jurisdiction of a crypto exchange is formally determined by the state in which the servers of the exchange’s website are located.

What coins are traded on this exchange

Find out on the exchange’s website whether it provides the opportunity to trade the coins (koins, cryptocurrencies) you are interested in. The first, main and most expensive cryptocurrency today is bitcoin. The other coins are called altcoins. In second place after bitcoin in terms of liquidity is Ethereum. Stablecoins are cryptocurrencies, the value of which is tied to one or another fiat currency (that is, conventional currency – dollar or euro) and to other crypto-assets. And also to commodities that are traded on an exchange, such as precious metals and gas: one such stablecoin is Tiberius, backed by the prices of seven precious metals.

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