What is margin Trading
Margin trading is a type of trading which is correlated with the lending market. It enables an investor to invest more on a trade than what s/he can afford. It is one of the riskiest types of trading, however the most profitable one that allows a trader to open a position with leverage. A Margin Trader/Short Investor borrows cryptocurrencies either peer to peer or from the exchange.
How to trade
As discussed above, a Margin Account offers you to buy more units of cryptocurrencies than you can afford.
You need to deposit a minimum amount of the cryptocurrency supported by the Exchange which is called the Initial/Minimum Margin. You also need to hold a minimum amount of the supported cryptocurrency known as the Maintenance Margin which is required to keep a position open.
Now, let’s try to understand how much profit or loss you can make.
Example: Let us assume that the price of the Cryptocurrency you’ll be trading with is worth $100 and you predict, it will go up by 10%. Let us also assume that you have $100 in your Margin Account. Now all you need to do is to select leverage which will depend on the exchange but let’s assume it to be 10X here.
So your potential profit will be $100 * 10 * 10% / 100% = $100
Keeping the same example component what if your prediction fails:
If the price crosses your liquidation price, your position will liquidate subjecting a whole loss of money that you put into that trade. A thing to remember here is; more you increase leverage the liquidation price will be closer to the current price.
Since keeping your digital assets in an exchange is not advised by Crypto Gurus as there is always a threat of losing them because Crypto Exchanges are always hot target of hackers.
But, as Margin Trading allows us to trade without having the exact amount of cryptocurrency required, we can keep lesser amount of our digital assets in exchanges and the rest HODLINGS could be kept in secured cold wallets.