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Margin trading is a renowned practice in the traditional stock market. It is a trading method where the investor borrows money from a broker to trade a financial asset at a higher risk and earns higher returns. Of course, if the market trend goes the other way, the investor will end up losing the money.
If you are planning to venture in the crypto exchange business then including margin trading services will add value to the platform thereby attracting more users. But crypto is a complex space and requires a strong foundation to enable different trading functions on the platform.
Here’s what you need to know about crypto margin trading before starting your new project –
To start margin trading, users have to deposit a minimum amount known as the initial margin or maintenance margin. The initial margin is fixed based on the leverage ratio for the amount the user wants to borrow from the exchange. This borrowed amount is traded throughout the day.
The user has to close the trading and cash the returns at the end of the day and start fresh every day.
The leverage ratio is the extent of the risk a user wants to take. It is either denoted using a numberX or as a ratio- risk: 1. For example, 100X or 100:1 means that the user is going to open trading at 100 times the amount of their deposit. If the user’s speculations pay off, he/ she will make a profit on the same scale.
But what if the speculations go wrong? The users cannot lose more than what they have invested. Therefore, the loss will not be multiplied by 100 times. However, the loss can impact the exchange as the user will not be able to pay the borrowed amount. This is prevented through margin call and liquidation.
Collateral is the additional amount the user will have to pay if the market is going against their speculations. And if the user is sinking further into losses, the exchange has the right to impose a margin call and ask the user to liquidate the position.
The Leverage and margin trading exchange development company will set up the margin call and liquidation controls based on the level of risk you want to allow on the platform. By fixing the point where you can use margin call, you can control the extent of loss incurred by the user. Furthermore, the user will have to liquidate the position and pay back the borrowed amount.
The success of your crypto margin trading platform depends on how well your exchange has been developed. The aim is to maximize gains while minimizing the risk of losses, both for the users and for the exchange.
Choose a leading Whitelabel Margin trading software development company to develop a full stack exchange for your business. A White label platform is ready-to-use and can be customized according to your requirements. Ultimately, it allows you to focus on risk management as well as user experience.
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