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Guide to Margin Trading Crypto

By Brian Nibley · January 28, 2022 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Guide to Margin Trading Crypto

What if it were possible to trade crypto with more money than you actually have?

Margin trading in crypto involves just that. In exchange for some extra fees and interest, traders can try to amplify their gains (or losses) using borrowed money. This high-risk strategy is common among professional traders.

In crypto markets, margin trading has the potential to lead to unbelievable gains — or devastating losses. Novice traders would do well to exercise extreme caution when trading on margin.

In this guide, we’ll cover what margin trading is and how to margin trade crypto so you can decide if it’s right for you.

What Is Margin Trading Cryptocurrency?

Margin trading in crypto involves borrowing funds from an exchange and using it to make a trade. Margin trading is also referred to as trading with leverage because it involves traders “leveraging up” their trades beyond the existing capital they have to work with.

Margin Trading Cryptocurrency Example

Here’s an example: imagine that a trader opens a long position on Bitcoin for $100 and the price rises by 10%. The trader would make $10 in profit (excluding any fees).

If that same trader were to make the same trade using 5x leverage, their profit would be $50 (10 x 5 = 50).

Some investors who use margin trading in crypto use 10x, 50x, or even 100x leverage. This can amplify potential gains, but it also comes with much greater risk.

How Does Margin Trading Crypto Work?

Margin trading crypto involves borrowing money in order to make larger or more trades. But an important factor to keep in mind is what’s called the liquidation price. When the market reaches the liquidation price, the exchange will automically close a position. This is done so that traders only lose their own money and not the funds that were lent out to them.

When one is trading with only their own funds, the liquidation price for a long position on an asset is zero. But with increasing leverage, the liquidation price climbs closer to the price at which a trader buys.

Investors can use margin lending to establish either long or short positions (yes, it’s possible to short Bitcoin), allowing for the potential to profit no matter which way the market moves.

For example, say the price of one Bitcoin (BTC) is $10,000. A trader wants to do some Bitcoin margin trading and establishes a long position by buying one Bitcoin with 2x leverage. That means they would have spent $10,000 and borrowed an additional $10,000 for a position worth $20,000 before fees and interest.

In this case, the liquidation price would be slightly over $5,000. Once this level has been reached, the trader would lose their entire investment plus interest and fees.

Here’s why: buying $10,000 worth of BTC would normally require the price to drop to zero for a trader to lose their entire position. But with 2x leverage, the bet has been doubled. A trader has amplified their potential gains or losses by two times their initial investment. Therefore, if the price drops 50%, they wind up losing 100% of what they invested (50 x 2 = 100).

The exact liquidation price in this example would be a little higher than 50% less than the buy price because part of the cost to open the position includes fees and interest.

Liquidation Price Calculation

To calculate the size of a market move that will trigger a liquidation, simply divide 100 by the level of leverage. For example, a position with 10x leverage requires only a 10% move to be liquidated (100 / 10 = 10). A 10% move can happen within hours or even minutes in the crypto markets.

Where Can You Trade Crypto on Margin?

There are a number of crypto exchanges that allow traders to trade on margin, including:

•   BitMEX

•   Binance Futures

•   Phemex

•   Huobi Futures

•   Bybit

•   KuCoin Futures

•   PrimeXBT

•   ApolloX

•   Delta Exchange

These exchanges offer leverage of anywhere from 10x to 125x. Trading with the use of leverage is risky in any market, and the more leverage used, the higher the risk. Margin trading in crypto markets is even riskier due to the extreme volatility.

What Are the Fees for Crypto Margin Trading?

There are two costs associated with margin trading crypto:

1.    Fees for opening a position

2.    Interest owed for borrowing coins

The interest rate, known as the “funding rate”, is peer-to-peer and depends on a variety of factors like the current premium between the spot and futures price of an asset. This rate is usually re-calculated each hour.

Pros and Cons of Margin Trading Cryptocurrency

As with any investment strategy, there are positives and negatives associated with margin trading in crypto. This chart maps them out.

Pros

Cons

Potential for large profits in a short amount of time Extremely high-risk — and any uptick in volatility increases risk even more
Allows traders to establish bigger positions with less capital It’s possible for traders to lose large amounts of money very fast. During bouts of volatility, trades may be liquidated at a loss before traders can react
Can provide a way to make winning trades during small market moves Requires near-perfect timing of the market
Allows traders to keep less crypto on an exchange A trader has to exit a position when it’s profitable, as market moves become amplified with leverage. Inexperienced traders are likely to take large losses when trading with leverage.

Risk Management and Cryptocurrency Margin Trading

Trading on margin is very high-risk. The higher the volatility and the more leverage used, the greater the risk, as the chances of a trader being “blown out” of their position (when the liquidation price hits) increases.

This makes margin trading in crypto among the riskiest endeavors an investor could possibly pursue.

In an attempt to manage this risk, many traders hedge their bets by opening opposing positions. This is a common way of dealing with investment risk management.

For example, if someone holds a lot of Bitcoin, this would be considered a long position. One way to hedge against the downward price volatility might be to place a leveraged short position. This way, if the price of Bitcoin falls, the short position will rise in value and the investor may recoup some of their losses.

The Takeaway

Margin trading in crypto is often utilized by professional traders. The leverage involved can lead to exaggerated market moves known as “long squeezes” or “short squeezes,” where a sudden price movement can trigger liquidations and result in greater volatility. This happens often in the crypto markets, which trade very thinly compared to most traditional markets.

Interested in cryptocurrency? With SoFi Invest®, you can trade cryptocurrency from more than two dozen coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

FAQ

Is crypto margin trading profitable?

When it works, margin trading in crypto can be very profitable. If a long position gets initiated right before a price surge, traders could make many times their initial investment. Of course, with cryptocurrency markets being very volatile, the opposite can just as easily happen. Large losses can be realized in short amounts of time.

Which coin is best for margin trading?

It depends on the individual. Someone looking to get into crypto margin trading with the least risk possible might consider Bitcoin to be the best coin because of its lower volatility when compared to other coins (note: that’s still a lot of volatility). Others might see smaller coins as being the best because they could potentially provide bigger returns on a shorter time frame.

Photo credit: iStock/Astarot


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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