> Blog > What is Margin Trading Crypto?

Published July 1, 2022

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Crypto offers a fresh trading experience for the traditional financial industry, yet it carries over some of the same principles from the financial trading world, making the space feel a bit more familiar to the average market trader. Margin trading crypto is one of the most popular trading options, yet it can be daunting territory for both newcomers and experienced market investors.

Let’s dive into what margin trading is and how you can take advantage of the feature to enhance your crypto trading experience. 

How Does Margin Trading Crypto Work?

Margin trading offers up a new range of possibilities for crypto traders to magnify their gains – or magnify their losses. It does this by allowing you to leverage a smaller position to borrow more money from exchanges to trade with.

By borrowing extra money to trade with, however, that loan from the exchange comes with significant risk: liquidation.

Margin trading crypto, also referred to as trading with leverage, places a “liquidation price” on your trades. If you open a margin trade and the asset being traded reaches your liquidation price, the exchange will automatically close or liquidate your position to ensure that you only lose your own money. This is done to maintain sustainability of margin trading on exchanges – without a liquidation price, the exchange would be losing its own money that was lent to you. 

In contrast to margin trading, spot trading has no liquidation price; since you are using your own funds, you can keep a trade open and ride your position all the way to zero if the market price trends that way. However, as you increase your leverage with margin trading, the liquidation price rises increasingly close to the price at which the trade was opened.

Opening a “long” entails borrowing money to buy an asset and sell it at a higher price, which places your liquidation price below the trade’s opening price. On the other hand, opening a “short” means that you are borrowing money to sell a particular asset and buy it back at a lower price, placing your liquidation price above the trade’s opening price.

Margin Trading Crypto Example

Let’s lay out a hypothetical example to demonstrate how margin trading works in practice.

Suppose that a bullish trader named Sam wants to margin trade bitcoin with 10x leverage. He opens a long with $1,000 and the BTC price rises by 10%. In this scenario, Sam would make a 100% gain, or $1,000, on this trade, as 10x leverage multiplies his percentage gains ten-fold. He now has $2,000 in his account.

In a more bearish scenario, let’s say that the BTC price drops by 5% instead of a 10% gain – in this case, Sam’s long position would lose him $500, or 50% of his $1,000 position, since the 10x leverage multiplied his 5% loss ten-fold. He would now have $500 in his account. 

As for shorting, let’s suppose that a bearish trader named Jill opens a margin trade to short bitcoin with 20x leverage. She opens a short with $1,000 and the BTC price drops by 5%. If this case, Jill would have made a 100% profit, or $1,000, since the 20x leverage multiplied her percentage gains twenty-fold. She would now have $2,000 in her account.

By contrast, if the BTC price rose by 5%, the exchange would liquidate her 20x short position, as the 20x leverage multiplied her 5% loss twenty-fold.  

This dynamic between leverage amount and price action demonstrates how liquidation prices work. Using 10x leverage, the exchange would liquidate a long position if the asset being traded drops by 10%, since the trader would have then lost 100% of their money (10% drop * 10x leverage = 100%). However, if the trader increases the leverage to 20x, it will only take a 5% drop in price to liquidate a long position (5% drop * 20x leverage = 100%). As it follows, a 100x long would only take a 1% drop in price to liquidate a position. 

So, as leverage increases, the liquidation price moves closer to the trade’s opening a price. This is why traders should exercise extreme caution when trading crypto with margin to avoid the risk of liquidation.

Pros and Cons of Margin Trading

Clearly, there is a lot of potential benefits and drawbacks to margin trading crypto, so be sure to keep these considerations in mind when margin trading:

Where Can You Trade Crypto on Margin?

If you understand the potential risks and rewards of crypto margin trading and want to try it out for yourself, there are several different exchanges that offer margin trading. Here are seven popular choices for margin trading crypto:

  • FTX.com – Up to 20x
  • Binance – Up to 20x
  • Bitmex – Up to 100x
  • Bybit – Up to 100x
  • Kraken – Up to 5x
  • KuCoin – Up to 100x
  • Phemex – Up to 100x

Managing Margin Trading

Margin trading can be a highly profitable but also highly risky trading strategy. For most crypto traders, sticking to spot trading is the safest and easiest way to make a profit in the crypto markets, but for traders looking for more advanced and rewarding strategies, margin trading serves as a viable option. Just be sure to consider the necessary precautions to take leveraged trades responsibly and effectively.

FTX.com lets users margin trade crypto with up to 20x leverage. With a wide array of other crypto derivatives trading tools, it’s one of the best platforms to buy and sell crypto.

Additionally, with every trade made on the platform, FTX pledges to donate a percentage of the proceeds to humanitarian-focused projects as part of the exchange’s focus on effective altruism. FTX aims to maximize the amount of good its platform can provide by going the extra mile to ensure that a portion of every dollar made on the platform is donated to charitable causes.

To support FTX in its effective altruism efforts, sign up for an account today, or join the FTT DAO – an independent community of like-minded FTX fans seeking to make an impact on the world through education, events and giving back. 

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