With the increasing volume of trades in the cryptocurrency market, Margin trading has gained huge popularity. New traders are trying to short/long coins daily and trying to make a living. It is a faster way to make more money than normal trading but it comes with a higher risk rate.
What is Margin Trading?
Margin trading is a way for cryptocurrency traders to take a loan from other traders on a set interest rate with their account balance as a collateral. On top of this, various exchanges provides you upto 100x leverage, which means you can take upto 100x times the amount than the collateral as a loan. Traders use this as a way to earn huge profits while paying small interest rates.
Risks in Margin Trading
While margin trading seems like a good opportunity to earn some nice money, it comes with higher risk rate. When you open a position in any cryptocurrency, you immediately start paying an interest rate which compounds daily. So, if you leave your position open for a number of days, you might lose a hefty portion of your collateral.
If your long position and get caught in a dump, you will lose 100% of your collateral in a matter of seconds. Exchanges as a way of protecting their lenders set a maintenance limit at which the coins you bought are automatically liquidated so that the lenders get their money back.
An Ethereum trader shared his experience on reddit about how he lost almost all his life earnings in a single margin call. He lost around 100BTC in a single margin call. Read the following thread for more info:
Minimizing the risks in Margin Trading
To minimize the risks while opening a position in any coin always:
- Invest only a percent of the holdings in a margin call. If you think that the position is doing well, invest another percent. Never go all in a single margin call.
- Write down a price when you are going to close. Have a price if things go south and a price if things go north.
- Dont make irrational decisions. Trust your past and your knowledge. The decisions made in the heat of the moment are mostly wrong.
- Dont trust people saying buy buy buy or sell sell sell on the internet. Stay away from rumours.
- Diversify your investments. Use different markets.
- Have balls when you make a loss. This is just a part of trading.