What if you could open trading positions using more money than you had in your account? Imagine depositing $1,000 yet being able to trade with $2,000, $3,000, or even $10,000.
That is entirely possible on many cryptocurrency exchanges, and is known as margin or leveraged trading.
We welcome you to our how-to guide. In the following lines, you will learn about margin trading in Bitcoin and cryptocurrency, how it works, the main exchanges that allow margin trading, and, most importantly, some must-read guidelines before placing even the smallest margin position.
What is Bitcoin margin trading?
In this tutorial, we will primarily focus on Bitcoin margin trading because it is the largest cryptocurrency by market capitalization and has the highest trading volume across all exchanges. However, the regulations and advice outlined below apply to all supported cryptocurrencies for margin trading, including Ethereum (ETH), Ripple (XRP), Solana (SOL), and others.
In essence, crypto margin trading is a method of utilizing cash granted by a third party, typically the exchange that you are using.
Margin trading enhances the results of your trading in two ways: it can increase your profits while also deepening your losses. The capacity to multiply trading results is what makes it so popular in low-volatility markets. Nonetheless, crypto margin trading is quite popular and has a consistent increase in overall volume over time.
For example, if we launched a Bitcoin margin position with 2X leverage and Bitcoin increased by 10%, our position would have returned 20% due to the 2X leverage. Without leverage, the ROI would have been only 10%.
Margin leverage can be 25X or even more; despite the danger, the same position outlined above would have yielded 250% (instead of 10% with no leverage).
Best Bitcoin & Crypto Margin Trading Exchanges
- Binance
- PrimeXBT
- BITMEX
- Phemex
- Bybit
- Huobi
- Kucoin
- Delta
- Poloniex
- Currency
- Bityard
- PrimeBIT
- Bitfinex
- Kraken
How Does Bitcoin Margin Trading Work?
In most cases, users can borrow funds from the exchange, which are either provided by other users who earn interest or by the exchange itself.
This enables traders to raise their trading money and open larger positions. The exchange is relatively risk-free since each position has a liquidation price that is determined by the amount of borrowed margin.
Margin and Perpetuals: Definitions, Differences, and Mechanics
If you’re new to Bitcoin margin trading, you should understand the key differences between margin trading and perpetual contracts. Both of these principles allow you to use borrowed cash to enhance possible returns (and, of course, risk), but they work differently and provide fresh challenges.
Main takeaways:
Remember these key differences:
- Margin trading involves borrowing funds directly and can be used for both spot and derivatives.
- Perpetuals are derivatives only and use collateral plus funding rates to manage positions.
- Both carry high risk, especially with leverage above 5x.
Bitcoin Margin Trading
This involves borrowing money from a cryptocurrency exchange or a broker to boost the size of your transaction. Instead of purchasing one BTC with your capital, you might use 5x leverage to control the equivalent of five BTC.
The remaining funds (the difference between 1 and 5 BTC) are often supplied by the exchange. Note that exchanges also provide lending and borrowing interfaces that allow customers to lend money at a set interest rate, which is then used to give margin to margin traders.
The leverage ratio is the multiple by which you borrow. For example, depositing $1,000 and selecting 5x leverage exposes you to $5,000 worth of Bitcoin. If BTC rises by, say, 2%, you win approximately $100 (5 x $20); if it falls by 2%, you lose $100 almost immediately.
Because losses eat away at your margin first, every platform tracks the maintenance margin level. If you fall below this level, you will receive a so-called margin call. It is a platform notification that you need to provide extra margin; if you don’t, the position will be immediately closed (liquidated) to protect the lender (in this example, the exchange).
Bitcoin margin trading terms glossary:
- Margin – the funds that you borrow to open a larger position.
- Leverage ratio – the multiple relative to your funds that you borrow.
- Maintenance margin – the margin required to keep your position open.
- Margin call – the notification you get to add more margin.
- Liquidation – a forced closure of your position in the event your margin is insufficient.
Bitcoin Perpetual Futures Trading
Perpetual futures contracts, sometimes known as “perps,” take leverage to the next level. Perps are a form of derivative contract that tracks the Bitcoin price but never expires. This means that traders can hold long or short positions forever without having to roll them forward, as is the case with typical futures contracts.
To keep contract prices aligned with the real BTC market, exchanges use a tiny balancing payment known as the funding rate. Every 8 hours (this may change), traders on one side push the contract “too far” from the spot price and pay the other side.
To better understand this, say BTC perps are trading $50 over the spot price. Long positions must pay a funding rate to short ones until prices converge. Once the contract falls below the spot price, the flow will reverse.
Furthermore, perps provide bigger leverage ratios—in some circumstances up to 100x—because the contract pays in cash rather than actual Bitcoin. Of course, this also comes with highly amplified risk profiles—a 1% move at 100x leverage will wipe out your entire margin and will trigger a liquidation in seconds.
Bitcoin perpetual futures trading terms glossary:
- Perpetual futures contracts – a type of derivative contract that never expires (unlike traditional futures contracts).
- Funding rate – a fee paid at pre-determined intervals from one party to the other to keep perp prices converged with spot prices.
Summary of Differences Between Bitcoin Margin Trading and Perpetual Futures Trading
With all of the previously mentioned in mind, here are some of the main distinctions digested:
Markets
Bitcoin margin trading allows users to place orders to purchase or sell directly on the spot market. This simply means that all orders are matched against those in the spot market. Bitcoin futures allow traders to place orders to purchase or sell contracts in the derivatives market; they do not share the same order book and hence have separate liquidity.
Leverage
When trading Bitcoin futures, consumers can take advantage of extremely high leverage, which varies depending on the exchange but typically approaches (or exceeds) 100x. Users can trade Bitcoin margins at an average of 3x to 10x, depending on the platform.
Trading Fees
Since Bitcoin margin trading and futures are conducted on completely different venues, the costs associated with each are typically different. Margin trading often follows spot market fees, whereas futures trading incurs derivatives market fees.
How Do I Short Bitcoin and Other Cryptocurrencies?
Do you want to have the opportunity to profit while the Bitcoin price falls? Margin trading makes this possible. A short position on Bitcoin essentially means betting that the BTC price will drop.
It works properly, simply. In essence, you buy Bitcoin at current levels, sell it, and then buy it again when the price lowers. It may be perplexing, so let’s use an example.
Let’s imagine Bitcoin is presently trading at $10,000, and you have $10,000 in your Binance margin account. Using this as collateral, you can borrow 2 BTC (for example) and sell it at current prices for $20,000. You now have $10,000 of your own money and $20,000 in borrowed money, and you must repay 2 BTC to the exchange.
Your plan works as planned, and the price of Bitcoin falls to $8,000. You decide it’s time to earn a profit. You pay $16,000 for 2 BTC (since that is how many you have to buy back). Remember how much you sold them for? $20,000.
This means that after repaying your loan (of 2 BTC), you will have $4,000 more in your account—congratulations, those are your gains. Of course, this assumes no fees, but it is also for the sake of simplicity.
Cross Margin vs. Isolated Margin
Many exchanges, like Binance Futures, allow users to use both cross-margin and isolated margin modes.
The difference between the two is the margin balance utilized to prevent liquidation. If cross-margin is enabled, the entire margin amount is distributed among open positions to avoid liquidations. This means that if the margin account is liquidated, the trader risks losing the whole balance as well as any open positions.
The balance assigned to a single position is referred to as the isolated margin. This means that the trader can manage their risk on various positions by limiting the amount of margin assigned to each of them. If a position is liquidated, it does not affect the trader’s overall balance or other open positions. It can also be modified separately.
Costs and risks of cryptocurrency margin trading
Even if you are technically utilizing borrowed cash, you cannot wind up owing money to the platform, as this would pose a significant risk to the exchange itself. As a result, you can only lose the amount in your balance. This occurrence, if it occurs, is known as liquidation. Even though we discussed it before, let us elaborate because it is perhaps the most significant risk and factor to keep in mind.
The liquidation price is the moment at which the exchange will close your trade automatically. Let’s take an example.
Imagine you have 1,000 USDT and want to borrow another 1,000 USDT. Then you use the combined 2,000 USDT to purchase BTC. If BTC falls to the point where you lose your borrowed margin (the 1,000 USDT), the position will immediately close. And, because 1,000 is exactly half of 2,000, your liquidation price will be 50% lower than your entrance price.
That is why we recommend that the more the margin you borrow, the closer your liquidation price will be to the entrance price. It is much the same as utilizing leverage in futures trading.
As previously stated, the costs of maintaining a margin position include paying continuous interest on borrowed funds, as well as fees for opening and closing the position with the exchange. Keep in mind that as the opportunity to gain more grows, so does the possibility of losing more.
Margin Trading Tips: Before Placing Orders
Margin trading is not recommended for beginners due to the risks involved. As a result, if you’re new to this form of trading, we’ve compiled a list of must-read suggestions to guide you through it. Keep in mind that this sort of trading includes a higher risk of capital loss, and you should never deal with funds you cannot afford to lose.
Always begin trading with small amounts.
Is today your first day of margin trading? Even if it isn’t, try starting small. Gain the essential confidence and experience before entering into the raging waters of margin trading.
Do not go all in at once.
Even if you are 100% sure in your trading abilities, it is best to separate your positions and establish a price ladder. In this manner, you may minimize risk while lowering your entrance price. The same is true for profit taking: you can put up a ladder to profit as you go up.
Understand fees and liquidation.
You must always be aware of the amount and kind of fees you pay.
Margin trading involves continuous costs, so make sure they don’t eat up your entire profit or, worse, your balance. The same is true for keeping track of your liquidation price; you must know it in case the position approaches sooner than intended. This brings us to the following point.
Risk management
When trading on margin, establish explicit risk management criteria and follow to them. Don’t become greedy. Consider how much money you are willing to risk, and remember that you could lose it all. Always set stop loss levels. This prevents your entire stack from being liquidated.
Price manipulation: short/long squeeze.
The cryptocurrency markets remain largely uncontrolled. It is not common to see short and extended squeeze events, which are also related to the market’s present size.
When there are a lot of short or long positions, a market player might squeeze them by causing an adverse price move, forcing them to liquidate, or hunting their stop-loss orders.
Margin for Short-Term Trading
Cryptocurrencies are extremely volatile assets. Margin trading increases the potential risks connected with trading them even further. As a result, aim to open short-term margin trading positions (as opposed to spot trading or investment positions) and continually monitor them.
Furthermore, remember that you are paying continuous fees for the borrowed margin, and while the daily fees may appear insignificant in the short term, they can quickly add up.
Major events in the space, such as Bitcoin ETF decisions, SEC regulations, exchange closures, and so on, can have a substantial impact on the price of Bitcoin.
Even while traders mostly focus on technical analysis, keep in mind that these events may have a significant impact on the market.
Under extreme volatility – don’t go away.
Extreme price fluctuations are frequent while trading Bitcoin and other cryptocurrencies, and they can occur in either way. The risk with margin trading is that these wicks will touch your liquidation price, wiping out your entire position. The larger your margin, the closer the liquidation price.