The global extent of cryptocurrency user base has increased approximately 190 percent since 2018, according to Statista. As of yet, vast majority of these users have entered the crypto market for speculation.
Bitcoin is considered a high-risk investment, alt coins and NFTs even more so. Cryptocurrencies are volatile but there are several strategies you can use to profit on that volatility by trading.
While this opens up an exciting opportunity, we must do our research before stepping into the market.
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Crypto Trading vs Crypto Investing
There are two kinds of crypto enthusiasts in the financial market: investors and traders. In this article we focus on traders, in particular on novice traders who want to dab into leveraged trading crypto.
Amongst the many trading opportunities in the market, margin trading is one exciting but high risk trading technique. While this process can boost your crypto profits, there are quite a few beginner mistakes you should avoid to lower your risks of losing really badly.
Since this is a 101, let us first understand what exactly crypto margin trading is and how it works.
Already familiar with all this? Jump to the list of margin trading mistakes
101: What is Crypto Margin Trading?
When you open any trading account there are two types of positions: short and long. A short position is betting against the price of the crypto asset whereas a long position is betting for the price of the crypto stock to increase.
Engaging in crypto margin trading means borrowing money from a third party like a crypto exchange or a margin lender, to trade in the crypto market with more capital than you have in your trading account. This additional trading balance is called leverage.
Trading on leverage is technically a very simple process but comes with risks. Very similar to margin trading on legacy stock markets, it allows you to earn huge profits but at higher risks of loss.
Simple example: If you choose a 50% margin then you can purchase $500 worth of BTC with $250 of your own money with the remaining $250 being loaned by the third party.
What is Initial Margin?
The most important principle to note here is that you need to keep a certain percentage of your original invested capital to keep your leveraged position open. This is a set amount which will be held in your margin account as collateral by your trading platform, to make sure you never end up owing money to your lender.
This default balance is sometimes called initial margin. Since this is a requirement, the initial margin levels are always specified by crypto exchanges in their terms.
What is Margin Call?
Once again, purchasing bitcoin and alt coins on margins is risky due to the market fluctuations. So when the market turns against your open margin position and your account balance falls below a certain threshold, your trading platform or broker will issue a margin call that tells you to add more money to your account.
If you fail to do so, the broker can sell off the position and charge you. This is called liquidation, or in crypto traders’ jargon, getting rekt.
Every trading platform functions on different rules, so be sure to look up the terms of your broker.
But as for crypto trading platforms, very often margin call already equals liquidation. This is due to the high volatility of crypto markets and also due to the fact that the markets are not regulated and it is even still possible to trade crypto without KYC.
Why do Coin Traders Use Leverage?
Speculative margin traders use the fluctuations in the cryptocurrency market to earn profits.
The price volatility in crypto markets being high as it is, the profits coming from margin trading can be truly outsized. The chance of an outsized gain is mostly what appeals to individual retail traders who are typically not interested in the premise of cryptocurrencies.
There are non-directional and non-speculative ways of using leveraged trading too, such as derisking. Hedging and yield strategies appeal most to hodlers.
While trading on leverage may sound like an easy process, it requires experience, skills, strategies, and preparation to make the most of your investment.
Most successful margin traders are considered serious traders as it requires them to approach the crypto market differently to succeed. Conversely, do not attempt margin trading crypto unless you are willing to learn the skill and slowly gain experience.
5 Beginner Mistakes in Crypto Margin Trading
- Avoiding Practice with Paper Trading or Small Positions
One of the most common mistakes made by amateurs or beginner traders is directly starting with money. Especially with big money - whatever it is that feels like big money to you.
If you are interested in becoming an experienced trader, it requires skill, knowledge, and a whole lot of practice.
Investing blindly can do you more harm than any good. When you practice trading through a paper trading account, it allows you to try different strategies and understand how they work. It also teaches you how margin trading crypto works technically.
What paper trading cannot teach you is working with your emotions. Trading psychology is something that only enters the game when you start using real money. That is why many traders recommend starting with a real trading account as soon as possible, but keeping your positions trivially small at first.
So before you start investing with real money, consider paper trading as it can improve your trading skills and make better decisions.
- Not Using Stop Loss
Stop Loss is an in-built feature in most crypto exchanges to prevent taking further losses beyond a certain level that you can specify for each of your leveraged positions.
It means setting a limit for your trading to close your trade at breakeven or not too far below. Traders use the stop loss feature for risk management. No matter how experienced or confident you are in trading, utilizing the stop-loss feature is always helpful.
One of the tricks that most newbie margin traders do not think of is moving your stop loss.
Basic example: You are margin long DOGE on the DOGEUSD market. Your entry price was $0.76 and your stop loss was at $0.71. The market moved and now DOGE sits at $0.8 and you move your stop loss to $0.78. This way it is guaranteed that you will exit the position with at least some profit, no matter how the market moves next.
Since the crypto market is volatile, setting a stop-loss and moving it into profit will help you lock-in your gains.
- Paying high fees
In crypto margin trading, an investor borrows money from a third party so that they can use it as leverage. In futures trading, there is usually no fee to use leverage. On the contrary in spot trading, you pay your lender a fee for providing you with the extra money.
Choose the right trading platform while margin trading. Platforms like Bitfinex let you track how expensive your margin loans are. If you are not happy with the costs your lender is charging, you can close the loan and the platform will assign you a different, cheaper lender.
This is an easy to avoid unnecessary costs in margin trading and earn a higher total profit.
- Revenge Trading
As an investor or trader, you must learn to accept losses.
Even the most experienced traders face losses, sometimes daily. Yes, it can be frustrating and annoying but attempting to take on riskier trades during your loss is bad management of your finances.
It is better to take a step back than to take three steps forward when you face loss. Instead, focus on improving your trading plan and also find out what you missed out on to avoid further losses.
- Not doing fundamental analysis
Way too many crypto trading newbies just choose popular cryptocurrencies and start trading.
While this technique can be fun and often rewarding, in the long run, the habit of not doing your research will cost you money. Even without margin, your bad investment choices will negatively affect your crypto portfolio.
The best to avoid this mistake is by doing a fundamental analysis of the assets you are interested in.
Several crypto analysis tools can help you make an informed decision. This in turn can help you mitigate future losses.
By using the aforementioned tips, you can avoid making beginner mistakes and invest in the right platform at the right time. Understanding the different ways of cryptocurrency markets will help you earn loads of money.
Even though margin trading is very risky, it can be highly profitable when done right. Nobody wants to hear this, but it is just a skill that can develop through focused work over time.