Margin is a term that is very familiar to those involved in the business world, including trading crypto assets.
This method of trading crypto assets uses funds obtained from third parties.
So, what is the purpose of margin on crypto assets? To find out, let’s see the full review here!
What Are Margins?
The definition of margin, namely the value/percentage of profits from traded products/services.
Meanwhile, how calculating margin can be done by dividing profits by capital, then multiplying by one hundred percent or formulated as follows:
Margin = profit: capital x 100%
Beyond understanding the profit percentage above, the margin can also be interpreted as the profit/difference between the selling price of goods and the capital spent to produce/buy those goods.
What Is Margin in Crypto Trading?
In crypto trading, the margin is a method/procedure for trading assets using funds from third parties.
In the crypto industry, the third party is not a securities company or broker but a crypto trading platform, as with other investment instruments.
As a third party, this trading company/platform will provide funds as leverage.
As for traders with margin accounts, later, it is possible to open positions and increase positions with a larger amount of capital in the market.
Margin trading seeks to strengthen trading results, so the profits are even more significant when the trade is successful.
Crypto traders are known to do this margin trading very often. The reason is profits will be obtained more quickly. This is also in line with crypto prices, which are also very volatile.
On the other hand, margin trading does not require deposit funds and large amounts of funds to open high positions in the market.
This happened because of the facility to borrow funds and add balances from the leverage facility offered by the third party.
Usually, the crypto platform as a third party will allow traders to choose the leverage to use on their margin account.
However, it should be underlined that each trading platform has its terms and policies, which are different.
How Does Margin Trading Work?
Margin trading begins when a trader opens a margin account by borrowing crypto from a broker/broker.
Here, as a guarantee, the trader will make a deposit. Then, traders who receive crypto loans will be charged interest, both weekly and monthly, according to the agreement.
Later, when the borrowed asset is sold, the loan will be paid immediately.
It is important to understand this service is provided to increase investors’ purchasing power so that they can buy more crypto.
When the asset is purchased, crypto will enter as a loan. The amount of assets that can be bought later depends on the price and the collateral value available.
Usually, brokers/brokers allow traders to borrow twice the collateral value.
For example, if you want to buy a crypto asset worth $ 1,000, then the minimum guarantee you have in a margin account is $ 500.
Terms to Understand on Margin in Crypto Assets
Several terms are related to margin trading, ranging from stop loss to margin calls. Here’s an explanation.
1. Stop Loss
Stop Loss is the value set to buy/sell a security when the price hits a certain point.
This value is used to limit losses and secure a desired position. Therefore, Stop Loss is often termed a “loss limit.”
In determining the size of the stop loss value, there are no definite provisions.
However, the value will generally be set at 2% to 3% of total equity.
It also depends on market analysis and the strategy used by each trader.
By determining a stop loss, the trader has carried out risk management so that he will not suffer significant losses in the future.
As previously mentioned, the margin is funds lent by third parties, both brokers and platforms, to traders to purchase securities/assets.
This one method allows traders to buy more crypto than usual later.
Apart from that, traders must also have a margin account, which will be different from the usual account.
The broker will use this margin account to withdraw the funds, and then traders can use it.
Later, the securities the trader purchases will become collateral on that margin account.
Usually, the margin will be expressed as a percentage of the full position, for example, 0.25%; 0.5%; 1%; 2%; etc.
For information, the calculation of the maximum leverage that can be used will be affected by setting margins.
Leverage is affected by margin setting. In this case, the relationship between the two is an important factor.
Leverage is funds lent by brokers to buy crypto assets.
If the borrowed leverage is significant, the profit will likely also be large.
However, in line with that, the risks will be even greater.
For example, if the trader opens a trading position with a value of 100 with a leverage of 1: 10, he will earn 10 of his capital, bringing the total to 1,000.
Leverage has different levels on each platform and market. The crypto market’s ratios range from 1: 2 to 1: 100.
4. Margin Calls
Margin calls in crypto are a protection mechanism for crypto exchanges to ensure that a trader’s position remains protected.
This occurs when a trader’s equity (account value) drops to a certain percentage of the used margin.
The main purpose of a margin call is to ensure that risks to the exchange are controlled and to maintain market stability.
Securities firms usually make margin calls when a trader’s margin account value falls below the amount requested by the broker.
To prevent being hit by a margin call, investors can add capital to a margin account or close trading positions before a margin call occurs.
However, when the investor’s equity value is below/less than the specified percentage of the security’s market value, the broker will ask the investor to sell some of his assets or increase the value/position to a minimum value.
If the margin call position is not fulfilled, the broker will immediately close the position on the market to return the minimum margin account value.
In addition, traders will also be charged transaction fees, and users will be fully responsible for bearing losses.
5. Take Profits
Take profit is an activity carried out to determine the profit target limit.
Take profit can be interpreted as an order used to close a trade when the value has reached a certain level of profit margin.
The take profit value is determined after the stop loss value has been determined, namely by using the Risk and Reward strategy that the trader previously planned.
For example, with a 1:2 ratio, the take profit will have twice the value of the stop loss. On the other hand, the take-profit value cannot be determined arbitrarily.
The reason is that the determination must be made rationally, namely by considering market conditions and getting rid of the greediness to take profits.
Margin Gains and Losses in Crypto Assets
So, what are the advantages and disadvantages of margining crypto assets?
The advantage is that investors who make transactions can get a large amount even though their capital is small.
Margin trading is a facility that will also provide flexibility for traders in transacting with significant funds.
Meanwhile, the disadvantage lies in the relatively high-interest rates. Buying assets on margin means owing a debt to the broker/platform.
Interest is relatively high because the platform has lent capital to trading traders. As is known, the trading activity itself is an increased risk.
Besides that, another disadvantage for traders is when the market is weak.
The reason is that asset prices continue to decline, and margin trading users will be exposed to margin calls.
Therefore, when the asset’s value decreases, the broker’s guarantee also decreases.
In conclusion, the margin is the percentage or profit value of traded products or services.
In crypto asset trading, the margin is defined as trading assets using funds from third parties, in this case, crypto trading platforms, in the form of leverage.
The margin trading process begins when a trader opens a margin account by borrowing crypto from the platform.
The trader will then make a deposit as collateral. Later, traders will also be charged interest according to the agreement.
The loan will be paid immediately when the borrowed asset is sold later.
So, now you’ve learned what margin trading is.
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