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Margin's Role In Cryptocurrency Trading


Those with even a passing knowledge of the history of bitcoin or the broader cryptocurrency market understand that the value of the digital currencies like bitcoin and litecoin have been on a rollercoaster throughout the previous few years.

Although valuations have become more modest, cryptocurrencies circa 2019 remain just as volatile as ever, sometimes experiencing 20% changes in a matter of hours. This volatility and the myriad unknowns that still orbit cryptocurrencies have turned some traders off of the digital assets. But others have recognized opportunity in these price swings and have attempted to adapt advanced trading techniques from other assets to the cryptocurrency market.

Catering to this contingent, cryptocurrency and trading platforms like CryptoRocket began offering traders up to 100:1 leverage on cryptocurrency trades. Coupled with the historic volatility that has characterized cryptocurrencies, this level of margin might off traders unfamiliar with how digital assets can be traded.

Whether or not cryptocurrency trading is for you, understanding how the market can be traded and how of margin can be used to improve returns is valuable information. Below are some basic facts about cryptocurrency and margin to help better explain how cryptocurrency traders use margin and manage risk.

The Basics of Margin

For clarity, margin is borrowed capital provided by a broker that traders can use to increase their leverage in a trade. Margin is borrowed from a broker against traders’ own capital at a specified rate of interest or flat fee that is repaid on the completion of the trade. Traders in these markets are generally made in lots that represent 100,000 units, with each unit representing 1/100 of the base currency's smallest denomination. So in the case of the U.S. dollar, one full lot is equal to $10 (100,000 x 0.0001). An increasing number of Forex platforms also offer fractional lot sizes of 10,000 and 1,000 units.

Access up to 100x leverage on cryptocurrency pairs on CryptoRocket

These fractional sizes are one reason margin is so commonly leveraged in most Forex and cryptocurrency speculation. Having access to leveraged capital helps to expedite trading in these markets and allow traders to hold a larger position in these assets without needing to put up the capital to buy them outright, which isn't their intention anyway since traders rarely seek delivery of the currencies upon which they are speculating.

This leverage becomes more important in cryptocurrency trading, where lot valuations can vary anywhere from thousands of dollars to less than a dollar. To facilitate trading in these digital currencies, CryptoRocket offers 100:1 margin more than 30 cryptocurrency pairs (and 500:1 margin on Forex trades) at full, mini and micro lot sizes. This standard fee and flexibility lot size allows traders the flexibility to better exercise the higher leverage the platform provides for a lower cost than percentage-based margin trading.

Of course, margin can be a double-edged sword. Using leverage to increase buying power can generate outsized returns, but it can also lead to outsized loss. Either way, traders are expected to cover the borrowed funds in their accounts. Failure to cover can result in a margin call, which can entail a trader being locked out of her account and their positions being closed by the broker.

CryptoRocket, as well as most cryptocurrency and forex platforms that offer traders a high degree of leverage, also stipulate that traders should suitably fund their accounts beyond the minimum required to borrow. CryptoRocket’s terms of service suggest maintaining account equity above 30% of the margin.

Overall, the key rule of thumb in margin trading is that one should never borrow more than one is willing and able to lose.

Why Trade Cryptocurrency On Margin?

Of course, understanding the principles of margin is different than exercising them, particularly in the often volatile digital asset markets. On the day of this writing around noon, major cryptocurrencies like litecoin and ethereum have climbed anywhere from 3%-6% over the previous day. But one week prior to this, both had fallen by that same amount in a similar span.

While this may raise a red flag for some, others with a higher risk tolerance recognize that this kind of volatility can prove more profitable than stocks or other currency markets. This is where advanced order types, quick execution and proper risk management come into play.

Trade more than 30 cryptocurrency pairs with CryptoRocket

Beyond straight market orders, CryptoRocket’s platform allows traders to execute limit, stop loss and trailing stops to mitigate excessive loss. These order types facilitate traders to plan and to execute complex strategies across different assets or even different exchanges, often ones that are correlated to one another. This opens up the potential for hedging, arbitrage and derivatives trades.

What’s more, the platform waives transaction fees for deposits and withdrawals and is highly rated by users for its quick withdrawal and execution times, which minimize slippage and greatly reduce the time between execution and fulfillment.

Any experienced active trader knows there is more to trading than knowing the facts and that experience is the best teacher. However, having a full accounting of both the rewards and the risks of margin, cryptocurrency and asset markets in general is never a bad place to start.

Risk Warning: Trading leveraged products such as Forex and CFDs may not be suitable for all investors as they carry a degree of risk to your capital. Please ensure that you fully understand the risks involved, taking into account your investments objectives and level of experience, before trading, and if necessary seek independent advice. Please read the full Risk Disclosure

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