Bitcoin Margin Trading

If you started to learn about trading with Bitcoin, you can often hear people saying that they have made thousands of dollars on a single deal without investing only a couple of bucks. Ever wondered how is that possible? Or went even beyond and question if this whole trading idea is just gambling? Let’s dig into the details and see if trading on margin is indeed gambling or not.

First of all, let set doubt at rest, trading on margin is not gambling IF you do it smart. There are couple of aspects you need to look at, consider and act upon in order to ensure your profit is maximized and at the same time you are protected against possible losses.

How to maximize profit?

The answer, in short, is relatively easy: use margin. However, if you look closely to the details you certainly will see that trading on margin also involves significant risk, so it also increases your possible losses.

What is margin trading?

Margin trading or buying on margin refers to a trading strategy when you borrow money to increase your available funds which when invested results in more profit compared to the fee you pay for borrowing.

The process is fairly simple, you open a margin account which will let you buy more assets than you can afford at the purchase time. You receive funds you can invest in and in exchange your broker will ask you to pay a margin fee. However, as the price of the underlying asset is moving there is a certain level of maintenance margin you need to keep on your account which ensures you will be solvent at the end of the deal. This is a percentage of the total amount borrowed. Maintenance margin requirements must be met at all time as otherwise the leveraged positions is automatically closed if the margin call (the request to add more funds to your margin account) is failed to fill up.

The leverage – the amount of money you multiple your original funds is commonly used on the traditional stock and forex markets as well. The usual leverage ratio on the stock markets are around 10-20x while on the forex markets it is 50x. It is important to see the more the price of the underlying asset moves the leveraged positions will move multiplied by as much as you take on leverage. Let’s say the underlying asset’s price increase by 1 USD, in a leverage positions where the ratio is 1:10, in this case, your margin trade has moved by 1*10 USD. So even low price volatility can lead to a significant amount of profit and at the same time results in great losses if it is not handled carefully.

On the cryptocurrency industry, there are only a couple of exchanges which offer margin trading as it needs a robust infrastructure in the background to handle day to day activities. Beyond this, some of the trading platforms which offers CFD trading maximize the amount of leverage position you can take in Bitcoin to 10x. Many Broker offer  up to 100x leverage which is a true game changer in the market.

Trading on margin is a speculative investment strategy as you must be very careful  in the direction of the market you choose.

Trading on Margin can be just like gambling IF…

You can see now that trading on margin can increase both your profit and loss side. Let’s see when trading on margin is just like gambling.

If you have no clue about what you are doing

When you trading with Bitcoin you risk your capital with every deal. Would you be comfortable jumping into something you do not have any knowledge about? Hopefully not. Traders can have a very diverse background coming from various segments. The main idea is to make sure you know what you do not know. So you can learn about it.

Before you start trading you need to understand the underlying product: Bitcoin and blockchain. It doesn’t mean you have to go into the very complex details of blockchain technology, but you must familiarize yourself with the basic terminology and market participant to understand the key factors moving the process. Public ledger, wallet, address, hash, mining are just some of the terms you have to be familiar with.

Depending on your background you also have to familiarize yourself with how markets work. As at the end, Bitcoin altcoins is just like any currency so their trading is very similar to what you can experience on the forex markets. There are hundreds and thousands of sources only where you can learn trading.

Once you have picked up the necessary knowledge about charts and derivative products you can test the water with a demo account. You will learn a lot from practice as well.

If you do not follow the news

It is like living under a rock. Bitcoin and other cryptocurrencies are very sensitive to breaking news. The piece of breaking news that affects the prices the most are government regulations, adoption, and exchange hacks. If you do not know what’s going on in the market you will have no idea what caused you to lose hundreds of dollars and do not know how to act upon it.

Make sure you follow the news in both the industry and more broadly on the general financial markets as they also have an impact on cryptocurrencies. You can follow companies in the industry and exchanges on Twitter where most corporations share immediate news with their followers. You can also use news aggregator services, like CoinSpectator or  CryptoPanic which gathers all the news into one platform relevant to the segment. Also, read opinion piece to make sure you see both sides of an event to be able to make your own judgment independently.

Following the news can be a very tedious process as you may never know when you can miss an event you cannot really be calm when not looking at the news. Imagine you take a break to eat lunch and you have lost a couple of hundreds of dollars because a big event just came out. To avoid this you can consider using trading bots which can follow your strategy with pre-determinedly programmed criteria. This can save you a solid amount of time as you do not have to look at the charts all day long, it reduces the number of manual interventions which can be accidentally incorrect. Using bots can also mean you can enter into multiple positions at the same time which will highly increase your possible profits.

If you do not consider high volatility

Everyone knows Bitcoin price can move rapidly. Cryptocurrencies are famous for their volatility. Look at this chart. The price of Bitcoin went up from 2000 USD to 20000 USD within 3 months time. And then crashed to 10000 USD within a week. That is 1000% increase and 500% decrease of a single position. It also happened that for during quiet the prices were just sidling for months or years, which happened for example during between 2015-2017 with Bitcoin too.

 

Within a couple of minutes and hours, the price can shoot to the moon or on the other side crashes imminently. If the price of one Bitcoin moves like 500 USD within a couple of hours time, imagine what a leveraged position can result in. Looking at the same price movement from a 100x leverage perspective meaning that your results are multiplied by a hundred times. That means 50000 dollars within hours time – but in both ways. You can earn 50k in a day and lose it at the same time.

So even if the 100x leverage on Margin sounds like a haven – think about it. With as volatility market as the cryptocurrency space, do you really need to multiply your profit and losses by 100? Start in small, leverage of 3x – 5x should be more than enough in terms of profit while it saves you from a lot of headaches in case of a market crash. If you start moving up your leverage to 50x  – 100x then you are just gambling and hoping that you picked the right direction.

 

If you trade based on emotions

Emotions and feelings are part of humans. However, trading with Bitcoin is serious business where your capital is at risk.

On the trading markets, it often happens that traders hit the sell button immediately when a piece of bad news comes out and as a little time passes, the market digest the news, understand the long term impacts of it, which at the end results in traders hitting the buy button twice. So overall the price of the asset first decreased at the beginning but then eventually become even higher than the original price level due to correction on the market.

 

You need to control your emotions as much possible to avoid FOMO – fear of missing out – situations. Here are a couple of tips which can help:

  • learn every day something new about trading and markets, this will broaden your mind and you will see events in perspective, analyze new charts to see new patterns.
  • do your homework and do market research before jumping into something you have just heard about
  • utilize the test environment many trading platforms offers or just simply paper trade. Write down your trading idea and see how the market moves. This will ensure your strategy will work in real life cases too.
  • create a trading plan, do not just pick random positions which you feel can work out. In most of the cases, they won’t unless you have a crystal ball.

Building your strategy and sticking to it is a crucial step in investments. Consider the following elements when thinking in your long term business goals: volatility, liquidity, and volume. Each of your trading decision should be viewed from these.

  1. Liquidity enables you to enter and exit attractive trades when the opportunity present
  2. Volatility provides you an idea about the potential profit and loss range.
  3. Volume shows what is the interest in the asset within a period of time.

Once you have set up your trading strategy regarding the possible direction of the market make sure you incorporate risk management as well. Things can go wrong but managing risk can limit the amount of funds you can.

When you are trading on margin your positions are extremely vulnerable to rapid and sharp price changes.

  • Set up a stop-loss. This will protect your earned profits. For long positions, you can set below a recent low price level for short positions above a recent peak.
  • Diversify. The experienced traders only risk up to 1% of their portfolio on a single trade. If you go beyond this make sure you have done in-depth research.

You can use bots as mentioned above but they also limit your potential profits as you need to either pay monthly fees for maintenance or pay someone who can program your trading idea.

How to minimize losses on Bitcoin Margin Trading?

Trading Bitcoin on Margin with 100x leverage without any trading strategy is just if you are in a casino. You make your best bet and hope the market moves in the right direction. But this should not necessarily be the case if you change your attitude.

Here are couple of tips you can use if you want to avoid trading on margin like gambling and save you from some big losses at the beginning.

  1. do your homework and learn continually. Make sure you have an in-depth research about the product and market you want to jump into. Broadening your knowledge will provide you a great perspective for various trading situations.
  2. limit the leverage you use. Even though many Brokers offers leverage up to 100x consider the situation if you really need to risk that much and the rewards worth it.
  3. follow the news. Keep your finger on the pulse of the market to avoid missing out enter and exit points.
  4. exclude your emotions. Trading is business, make rational decisions when it comes to enter or exit a trade.
  5. build and stick to your strategy. Do not just pick entry points blindly, set aside time build up your strategy based on research and testing and execute it along the way to earn your deserved profit at the end.