Margin cryptocurrency trading is, for vast amounts of crypto traders and investors, something they never heard of. Today, we are going to change that and explain to you how this investment product works and how it differs from trading cryptocurrencies through crypto exchanges.
This is a guest contribution from Mr. Michael Kuchar of the Trading Beasts. This article is for informational purposes only and does not constitute an investment advice.
Margin cryptocurrency trading
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CFDs or contracts for difference if you will, are contracts that you and your broker close together. While trading CFDs, we do not own any stock, cryptocurrency, or other assets, we own simply just contracts. A trader who owns a contract on let’s say Bitcoin knows at what price he executed the contract and for what price he can sell it right now to the broker. As the price of the cryptocurrency changes, so does how much a trader can receive once he closes the trade. CFD trading functions on margin bases, which means you pay only a portion, a margin, and rest of the investment is paid by the broker. Note that the broker does not provide leverage only from a goodness of its heart, but because not only that your profits are increased even if the price of the asset changes just slightly, but so are the losses.
John purchases a contract for one Bitcoin this morning when the buy price is $6400, and the sell price is $6450. He holds onto this contract until late afternoon when the buy price jumps to $6650 and the sell price to $6600. If he decides to get out of this contract at this time, he will receive $6600-6400= $200 profit. If John uses leverage 1:2 he will be investing not one Bitcoin, but two Bitcoins and in the example above he would not make $200 profit, but double this amount – $400. He also has to note the possibility that he will have to sell in loss. In such case, his losses would double as well.
Where to start learning margin cryptocurrency trading
There are many great guides that explain in depth how margin cryptocurrency trading works. I myself have created this guide for novice crypto traders who need a hand to understand how this relatively complex financial instrument works. There are, however, many other great sites you should watch out on a daily basis if you plan to get yourself in. The first one of them is definitely https://www.coindesk.com/. This website is a great source of crypto news and trust me, you want to know what’s going on in the crypto world when trading cryptocurrencies with leverage. Another website which I would recommend checking out is most definitely https://bitcointalk.org/. Unlike the two sources I have already mentioned, this one is actually a forum where all crypto enthusiasts come and meet to talk about their investments. If you thought this forum is only Bitcoin, it pleases me to correct you as there are many other coins discussed as well.
Type of Investors for whom margin trading is
Leverage trading has some ups and downs and like all financial instruments, it is not suitable for everybody. I would recommend it only to traders who are ready to stay behind the monitor to watch the charts and crypto news on daily basis. Unlike long-term investing, CFD cryptocurrency trading really does require your attention. Be that as it may, margin trading can be significantly more profitable as you are handling more capital than typical cryptocurrency investors who are investing through crypto exchanges with no leverage.
- Read More: The 4 Kinds of Bitcoin Investors, Which one are you?
The fact that you are trading with leverage means that you can earn more money than you would without this tool. At the same time, you can even lose more. That is why I would recommend margin trading with some real serious capital only to investors who have extensive experience. You can acquire it either by trading with small investments or by using a free demo account. Demo versions are offered almost by all CFD brokers no matter whether you will trade with them in the future with your real capital or not.