Margin trading can potentially help increase your return on investments. If you borrow funds through an exchange, you might be able to get a higher return when you trade bitcoin.
However, there are also high risks with margin trading that can lead to big losses. This article takes a look at how you can use margin when trading with bitcoin.
Understanding Margin Trading
Before you trade bitcoin on margin, it is important to understand how it works. To get started, you need an account operating on a digital currency exchange that is accepted in your country.
When this account is up and running, you will need approval for the amount of bitcoin you are looking to borrow. A decision is then made based on factors such as the currency pair and on which exchange you are trading.
Trading Bitcoin With GDAX
To trade bitcoin through GDAX with borrowed money, you need to select margin trading on its margin trading panel. When trading through GDAX, the leverage amount available to you depends on the currency pair with which you are trading.
For example, when trading with BTC/USD you get 3x leverage. So, if your BTC/USD has a value of $1,000, you will be able to buy or sell $3,000 of BTC/USD. GDAX will provide as much as $10,000 in margin for BTC/USD.
On the other hand, if you are looking to trade with BTC/EUR, GDAX has a euro 3,000 funding limit and offers a 2x leverage.
Margin Trading With Kraken
Kraken uses verification tiers to determine the margin amount you can borrow. If you want a greater leverage, you must provide the exchange with extra personal information.
For Tier 0, you only need to provide an email address, but you will not be able to borrow funds. With Tier 1, you can borrow up to 10 BTC, $3,000 or euro 3,000. Tier 1 requires your date of birth, full name, and country.
Tier 2 has the highest leverage of 50 BTC, $10,000 or euro 10,000. You must provide a physical address to access this tier.
Margin Trading With Bitfinex
Bitfinex differs from other digital currency exchanges, as it offers as much as 70 percent funding for purchases.
For example, if you want to make a $1,000 bitcoin transaction, Bitfinex will lend you $700, and you will only deposit $300. You can use their trading center to borrow funds in the available rates, amounts, and duration.
The variables for these funding terms are determined by those using the Bitfinex Funding Wallet.
The Use Of Margin Calls
Margin calls are used when the value of an account drops to a determined level. To avoid this and keep your account active, you need to sell assets or add money to stay at the required level.
A lot of exchanges can liquidate as many positions needed to keep your account current. For example, Kraken can close all the positions of a margin trader to bring an account to the requested level.
Bitfinex provides the exchange similar freedom to make sure borrowers are fully repaid.
What To Take Away
Margin trading on bitcoin can provide profitable results, but it also comes with risks. Therefore, it is important to have a risk management strategy to benefit from leverage but also protect yourself from liquidation.
Remember to do your research on the complex margin trading rules for the exchanges you use. To trade bitcoin effectively, read Bitcoin Market Journal and learn to invest like a pro!