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Many new and existing cryptocurrency exchange platforms are considering integrating leverage and margin trading into their exchanges to attract more users.
Though margin trading is widely prevalent in a conventional trading exchange such as New York Stock Exchange, Nasdaq and others, now it has started to disrupt the crypto market, too. Let us comprehend what is margin trading and what are the benefits of integrating it into a crypto exchange.
Margin trading enables traders to open more substantial trading positions by borrowing funds from a third party. It allows traders to have access to huge capital, thus allowing them to leverage their trade position.
This type of trading is gaining traction in the crypto market. Unlike in a conventional process, wherein investment bankers provide funds to traders for margin trading, in case of cryptocurrency margin trading, the funds are generally provided by other traders or crypto exchanges themselves.
For instance, if someone has opened a bitcoin margin position with 5X leverage and the price of bitcoin surges by 10% then the position will yield a 50% profit because of the 5X leverage. If in case there would be no leverage, then it would only yield a 10% ROI. Crypto margin varies from 2X to 100X; higher the leverage position, the higher the risk.
When a trade is initiated, the trader is required to deposit a specific percentage of trade as the margin money. It is denoted as an initial investment and is closely related to the concept of leverage. It is represented as a ratio of borrowed funds to the margin. For instance, if a trade is opened at $10,000 and the leverage ratio is 10:1, then the trader needs to deposit $1000 as margin money to execute the trade.
The ideal leverage ratio is 2:1 and futures contracts also follow a 10:1 leverage position. For the Forex market, the leverage goes up to 50:1 or even 200:1 in some cases. While in the cryptocurrency market, the ratio ranges between 2:1 and 100:1 and “X” being the terminology to denote the percentage (2X, 4X, 10X, 50X and so on).
Crypto margin trading is opened at both long and short positions to enable traders to anticipate prices on both sides of the dice. Further, we will discuss how to capitalize on both long and short trading opportunities of leverage and margin trading.
When traders open a long leverage position, it is anticipated that the price of the underlying cryptocurrency will go up and will yield considerable profit. On the contrary, if the price starts dropping significantly then the exchange could ask for more margin money to balance the margin percentage set at the time of the contract. This is called a margin call where more funds are deposited by the trader to maintain a margin position. If the trader fails to do so then his holding may also be sold off in the open market to realize the loss.
A short position is a position taken where traders anticipate that the price of the cryptocurrency will fall in the future. In this, the asset is sold with intend to buy it in the future at a reduced price. For instance, if a crypto trader has 5 bitcoins in his portfolio and is looking to hedge against the risk of decreasing bitcoin value, then to counter the risk the trader would take a short 10X leverage position and would trade on that.
Margin trading has many benefits over regular trading. It covers a larger sum of profit as it trades on multiple leverage factors. It also exhibits the benefit of diversification as a single trader can trade in multiple industries because what he only needs to pay is margin money to finalize the trade. Thus it is easier for a trader to open several positions with minimum capital investment amount.
However, given that the crypto market is highly volatile, the risk level is also high and requires a deep understanding to trade.
If you are planning to build leverage and margin trading exchange, Antier Solutions can help. Our blockchain engineers and subject matter experts can integrate margin trading into your exchange platform, helping your users to go long and short on various cryptocurrencies by up to 100 times.
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