Margin trading with cryptocurrency allows users to borrow money against their current funds to trade cryptocurrency “on margin” on an exchange. In other words, users can leverage their existing cryptocurrency or dollars by borrowing funds to increase their buying power (generally paying interest on the amount borrowed, but not always).[1][2][3][4]
For example, you put down $25 and leverage 4:1 to borrow $75 to buy $100 worth of Bitcoin. The only stipulation is that no matter what happens, you’ll have to pay back to $75 plus fees. In order to ensure they get the loaned amount back, an exchange will generally “call in” your margin trade once you hit a price where you would start losing the borrowed money (as they will let you borrow money to trade, but they don’t want you losing that money). A margin call can be avoided by putting more money into the position.
A given exchange will have a range of different leveraging options (2:1, 3.33:1, 4:1, 1000:1, etc.). Margin trading can be done short (where you bet on the price going down) or long (where you bet on the price going up). Further, it can be used to speculate, to hedge, or to avoid having to keep your full balance on an exchange.
Below we explain the basics of margin trading and warn of some of the risks.
TIP: Some exchanges will only offer margin trading to investors who meet certain stringent criteria, others are more flexible and will let you trade on margin if you have enough funds to cover the trade. For an example of an exchange that requires meeting criteria, with GDAX you must be an Eligible Contract Participant (“ECP,” as defined in Section 1a(18) of the Commodity Exchange Act and applicable regulations thereunder). That means if you aren’t an accredited investor or don’t to have access to a good bit of capital individually or through a partnership, then you cannot do margin trading on GDAX. Meanwhile, Kraken allows margin trading for all of their Tier 1 – 4 clients.[5]
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