Margin trading has become increasingly popular in the world of Bitcoin and altcoins. Speculators and investors can be exposed to volatile cryptocurrencies without buying them directly or owning them at any point. Nevertheless, one has to wonder whether margin trading is a blessing or a curse for cryptocurrency. So far, it seems to be both.
What Is Margin Trading?
For those unaware of what margin trading entails exactly, it revolves around using borrowed funds from a broker to trade financial assets. In this case, the trading involves Bitcoin or other cryptocurrencies. Traders can even leverage their position to further increase the potential profits – or losses – associated with their margin position.
Advantages and Disadvantages
Unsurprisingly, margin trading is a very risky venture. By using borrowed funds to “gamble” on future Bitcoin or altcoin prices, traders take very big risks. People still need to put up a certain amount of funds from their own resources to open a long or short position, but it is evident that there are no guarantees of making a profit. Especially in volatile markets such as Bitcoin, losses can occur equally as quickly as gains.
The upside is that investors are not required to buy Bitcoin itself. There is no conversion from fiat to Bitcoin involved, which makes margin trading very appealing to speculators. All they need is a suitable platform to margin trade Bitcoin or altcoins and sufficient funds to play around with. This venture is not appealing to everyone, but neither are cryptocurrencies in general.
Which Platforms Support Margin Trading?
Several cryptocurrency exchanges allow one to margin trade either Bitcoin or altcoins. Even though there is still room for more options, some of the popular platforms include BitMex, Bitfinex, WhaleClub, Kraken, Huobi Pro, and Poloniex. There’s no shortage of platforms on which to perform margin trading, but that doesn’t mean this venture is without risks.
How Risky Is Margin Trading?
As people have seen with the recent OKEx margin trading kerfuffle, things can get out of hand pretty quickly. Margin positions with maximum leverage can easily cause millions of dollars in losses which need to be covered, either by the trading platform or by other margin traders. Whether or not the companies in question can afford to cover such expenses is always a question mark.
The Effect on Crypto Prices
As is to be expected, margin trading causes a lot of volatility across the cryptocurrency markets. More people shorting the Bitcoin price will undoubtedly cause overall negative price pressure. In contrast, people who long the Bitcoin price can create positive developments. It is a very risky enterprise, and one that may not necessarily help Bitcoin or altcoins in the long term.
Margin trading should NOT be allowed. ONLY risk what you can afford Period.