What is margin trading?

Margin trading is an instrument that allows you to borrow money in order to be able to multiply your investment thanks to a leverage effect. This is a well-known practice that exists in the traditional financial markets but also in the cryptocurrency market.

However, we must be careful in the specific case of the crypto world because it is something that can be dangerous for investors who are not familiar with margin trading, especially for individuals who want to use too much leverage. .

Why borrow money to trade?

Margin trading is useful in traditional financial markets because price variations are quite small. Therefore, to increase its profits, it is possible, with the same amount of starting money, to multiply its potential profits (or losses) by using a leverage effect.

However, to use this leverage, it is necessary to borrow money, either from other investors or from the platforms themselves. Without borrowing this money, it is not possible to use leverage.

The leverage effect has the advantage of being able to multiply the potential gains of an investor who knows what he is doing. However, this is a double edged sword as it can also involve bigger losses. It is therefore a tool not to be used by anyone, only by individuals who have advanced knowledge of the world of cryptocurrencies.

Do I have to pay leverage fees?

When you borrow money to use leverage, there is no need to pay a fee as long as the total amount you use, including leverage, is less than the money you have at your disposal on the platform.

For example, if you are using X5 leverage and you have 5,000 euros on the exchange site, then you pay no leverage fees as long as you don’t invest more than 1,000 euros. Beyond this amount, it will be necessary to pay fees in order to finance your loans, which are never free.

It is important to only use leverage when you are certain that the extra profits you will make are greater than the fees you will pay to borrow money, otherwise using margin trading is not worthwhile. financially.

What are the risks of leverage in cryptocurrencies?

In traditional financial markets, the leverage effect is very useful because the markets are not very volatile. As a result, it allows you to increase your profits if you are at least competent in trading.

In the crypto markets, things are quite different. This is an ultra-volatile market where days at -40% or weeks at +50% have already taken place. By using leverage in such markets, you may experience what is called liquidation risk, i.e. you will lose all the money in your account.

For example, if you are using 2.5X leverage and the market goes down -40% on the day, that means your balance will drop to zero. It is therefore very important to be careful when using crypto margin trading. You should do without it as much as possible, except in the case where you want to “short” the market (bet downward) because you have to use this option to perform this action.

Margin trading is very dangerous in the world of cryptos, not only because of the huge market volatility, but also because of the funding fees which can also be very high in this industry.

Conclusion on margin trading

Margin trading consists of borrowing money in order to have a larger sum to invest. However, leverage is very dangerous in the world of cryptocurrencies because the markets are extremely volatile and you risk getting liquidated very quickly on an unexpected price change.

We personally advise against using margin trading because it is too dangerous a tool to use on such volatile underlyings as cryptos, not to mention the fact that funding costs for borrowing money can be in some very high cases.

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Nicholas

I discovered the world of cryptocurrencies in January 2018. Arrived at the worst time to invest, I have never stopped training since then and now share my knowledge in order to facilitate the adoption of cryptos.

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