Today we would like to dive into a topic that is not quite clear, but important for all traders, especially if you are just starting out on this path. Yes, we are talking about Crypto Margin Trading.
For our FMFW users, we have prepared an article with examples that explain the trading process in an easy-to-understand way. We hope that after reading it, it will be much clearer and, most importantly, easier for you to trade!
What Is Margin Trading?
Margin trading is a method of trading assets using funds provided by a third party. In other words, trading crypto on margin allows investors to buy and sell digital assets with more money than they have in their exchange accounts.
How does Margin Trading work in crypto?
Let’s look at the example below 👇
Jack has $1,000. He is confident that Bitcoin (BTC) will show significant growth in the near future. At the same time, Jack is unhappy with the amount of potential profit he can get from investing his $1,000.
To increase the profit from a transaction, you need to invest more money in it. To increase your profit without having to deposit more funds, you can lend the assets on a crypto exchange such as FMFW.io.
To do so Jack goes to the trading platform and buys an asset with 20x leverage, which means that he will have buying power 20 times his initial investment. This way, he is able to buy Bitcoin not for $1,000, but for $20,000, which dramatically increases his profit if his prediction is correct.
Simple, isn’t it?
Jack was lucky and picked a good time to buy in! He sold his BTC at a price 1,3x higher than the initial buy price, making a profit of 600%, which would be just 130% if he was trading with no leverage. He then retrieved margin, returning the loan, plus the interest for using loaned funds. Jack made the profit he would make from investing $20k without having to deposit this amount.
Here’s some calculations so that you can check yourself.
The market price for BTC is 20,000 USDT.
Jack uses 1000 USDT to buy 0.05 BTC.
Then, in a few days the BTC market price grows by 30% and reaches 26,000 USDT.
Jack sells his 0.05 BTC and gets 1300 USDT.
This makes his PnL (Profit and Loss) 130%.
The market price for BTC is 20,000 USDT.
Jack uses his buying power of 20,000 USDT to buy a whole 1 BTC!
The market price grows by 30% and reaches 26,000 USDT.
Jack sells his 1 BTC and gets 26,000 USDT.
This makes his PnL (Profit and Loss) 600% of the initial investment of 1000 USDT.
On FMFW.io trading fees and interest are deducted from the PnL automatically, so instead of 600% Jack would actually see around 598% PnL without having to do any additional calculations.
The risk and reward of Margin Trading
Jack’s story had a happy ending, but it’s important to remember that leverage works both ways, which might result in bigger loss or even liquidation.
Liquidation is a way for the exchange to not lose money from traders’ poor decisions. First, you will be requested to add more funds to increase your position. Then, if you do nothing, don’t set up a stop-loss order and don’t close your position yourself before it reaches the liquidation price, it will be closed automatically, and the invested money will be used to cover the loss that you caused to the exchange that lent the funds to you.
This is why setting up stop-loss orders is crucial, especially when trading with leverage, but actually it’s a good practice for spot trading as well!
If you aren’t confident in your trading skills, you don’t have to trade with max leverage. You can always use x3 or x5. For Jack it would mean additional 600 or 1200 USDT of profit respectively. The higher the leverage, the more you can gain, but you should keep in mind that your losses increase as well. Trade responsibly!
Long & Short positions
Long and short positions are two basic terms that every trader should familiarize themselves with at the beginning of their journey.
When you expect the price to go up, you buy at a lower price to then sell at a higher price. If you open a margin position by placing a buy order, this is called a long position. If you are trading the BTC/USDT pair, you can use more USDT that you actually have in your account. You close the position by selling all that you bought with the borrowed funds.
If you expect the price to fall down, however, you can also use margin to amplify your gains by opening a short position. You can open it by placing a sell order, this way you actually borrow the BTC that you sell instead of USDT. This way you can sell more assets than you really have. When the price has dropped, you can buy back the borrowed BTC to close the position and take profit.
Get started with FMFW Margin Trading!
Our FMFW.io exchange offers 170+ margin pairs against 5 quote currencies. With the deep liquidity and tight spreads you can easily trade with up to x12 leverage for margin trading and x100 leverage for Perpetuals Futures trading, which is a different thing by its nature, but shares the same principles of leverage, long/short position and liquidation, you can learn more about Futures trading here.
Also be sure to check out our Margin Trading Guide for more information!
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FMFW.io does not provide financial, legal, accounting, or tax advice. Any statement regarding such matters is explanatory and may not be relied upon as definitive advice. All users are advised to consult with their financial, legal, accounting, and tax advisers regarding any potential investment or trading activity.