Is Margin Trading Cryptocurrencies a Good Idea?
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In the wake of potential margin trading opportunities coming to Binance, it is only natural to ask whether or not it’s a good idea. Binance made a small update to public API documentation three weeks ago, which included code indicating that Binance is planning to implement margin trading on its platform. This, of course, stirred up the crypto community which is hoping for new trading strategies and larger profits. But the idea of margin trading itself sometimes flies over the heads of many traders who are just too caught up in the “hype train”. So let’s see if margin trading is actually a good idea and if it can bring any value to the market.
The nature of margin trading
Margin trading is more common with Forex than cryptocurrencies. But there are exceptions. According to this Bitcoin trading manual, traditional financial markets traders are used to margin trading with cryptocurrencies, but they are trading CFDs and not actual cryptos. Now that margin trading may become possible with actual cryptos on Binance, does this mean the CFD brokerages will disappear and Binance will get more customers? Well, it depends on a few factors.
The leverage and the spread are primary indicators of a person’s interest in a platform. If Binance hits the mark, then yes, more people will appear on the platform. But will the old ones remain?
Not everyone is a margin trader
You see, margin trading is quite limited, so to speak. Sure, traders are able to generate a lot more profits thanks to leverage, but what needs to be considered is the “narrow margin” that these traders have to execute the trades. Forex may be an ideal market for this type of trading because of the relatively low volatility, but when it comes to cryptocurrencies, margin trading can be only one of two things: a blessing, or a curse.
Thanks to the volatility of the crypto market, a coin can increase 15% or even 50% within a single day, or it can do the opposite. When the opposite happens, most crypto investors are able to just sit tight and wait it out, avoiding any unnecessary losses. But with margin trading it becomes impossible.
If the coin drops 50% within a day, you are guaranteed to have your trade closed. This means that you don’t have the option to hodl. You’re forced to take the hit in losses and hope for an increase on another coin.
Not as many advantages
The only advantage to margin trading is leverage. You get more funds to trade with, which can potentially land you better profits. But leverage comes with a price. The price is the option to hodl as mentioned earlier.
Let’s look at an example. The volatility of the market is extremely stable, which means no major price decreases or increases. At this point in time, it’s hard to have significant gains with or without leverage, so everybody is forced to sit tight and wait.
A margin trader would have to pay fees for having his position opened for more than 24 hours while a hodler can just relax and let his coins sit in his wallet without incurring any additional fees. By the time the price starts moving, the margin trader has paid a significant amount in fees, while the hodler hasn’t spent a dime.
Why use margin trading
The only imaginable reason why somebody would choose margin trading is their frequency of making trades. If a person is a day trader, and usually closes his trades within 24 or 48 hours, then using leverage is realistic. But that is the only case where it’s useful. Now let’s discuss the impact it will have on the market in general.
The market will benefit from margin trading
Before now, most crypto margin trading was done on small platforms; therefore, its impact was not significant enough to influence the market as a whole. However, if traders get their hands on margin trading on Binance, then it is most likely that the market will be affected.
With leverage, traders will be able to generate more profit, which will later be re-invested, growing the overall capital of the market. This may trigger another crypto boom, similar to the one we saw in December 2017.
So, overall, similar to CFDs, margin trading is good for day traders who close their trades within 24 hours, while hodlers, who prefer long-term trading will remain unchanged.