Cryptocurrency trading is a gamble, if done in the right manner with educated decisions, it can be very rewarding but it can also be very risky. One should always be cautious and prudent before putting their hard-earned money in cryptocurrencies.
So, one should be aware of Margin trading in order to make it both rewarding and less risky for you. Here is all about Margin trading, you need to know.
What Does Margin Trading Means?
Margin trading refers to the process of borrowing additional money/cryptocurrency by leveraging the number of cryptocurrencies already owned by the trader to buy additional cryptocurrencies.
Margin trading is a traditional method of trading which is now being used in crypto trading also. Let us understand the concept of Margin trading in crypto trading with an example.
Now, you have to make an investment of $4000 in BTC but you have only $1000 with you. So, now you need an extra $3000 BTC, which you can borrow through a margin of 4:1. Thus, for every $1 you get 3 dollars extra as margin).
After you have invested this money/BTC, you can reap your profit and give back the borrowed amount and enjoy profits of the remaining amount.
But this can be reversed also, for expel you have borrowed money as margin trading and the price of your BTC decrease by 50% then the right of the lender will be protected first and you will have to pay the lender $3000 and now you are left in a negative figure of -$2000.
So, margin lending if done wisely can be highly rewarding and if the gamble does wrong, it can leave you in a huge amount of debt.
Who gives away the money for Margin Trading?
The main question comes that who is giving away this extra money for lending and why? Many different brokers and individuals act as lenders of margin money and provide their own BTS or money for margin trading of cryptocurrencies. The main motive of lending is charging a nominal interest or fee on the money they lend.
When the traders are in loss or his portfolio performs poorly, then the position is closed to save the interest of the lenders and recovery of their principal and interest. It is done automatically by the brokers.
But on the reverse, if the trader is in profit, then the lenders get profits regularly on their money according to the terms and conditions of the trade.