As cryptocurrency has been growing around the world, exchanges dedicated to trading these currencies have been booming and creating a separate market from the traditional Forex market for these trades.
In this article, we’re looking at how the traditional form of margin trading is applied to the world of cryptocurrency exchanges, particularly here at Phemex.
The Original from of Margin trading is explored in What Is Margin Trading?
What is Margin in Crypto Trading?
Simply put, margin is a borrowed percentage of the funds needed to make a trade. In traditional trading this is set at a maximum of 50%, in crypto trading, the amount is set by the individual exchanges and based on the specific cryptocurrency being traded. This borrowed money can also be referred to as leverage. For this reason, margin trading in cryptocurrency is also referred to as leveraged trading. The leverage is the amount by which the trader is able to multiply their own balance. For example, if I had $10 to trade with and used margin with leverage of 50X, I would be able to trade with $500 (10 x 50).
Do You Need a Margin Account?
With regular trading, you need to have a specific margin account dedicated to trades made on margin. When trading crypto on margin though, you do not. The initial margin, maintenance margin, and margin call will be based on your exchange wallet balance. The funds needed for the trade will be held as collateral by the exchange and will not be shown as available in your balance.
How Bitcoin Margin Trading Works?
When you use leverage to open a position on Phemex, you are using margin. Different exchanges offer various amounts of leverage. At Phemex we can offer up to 100X leverage for your trades. Leverage can only be used for contract trading and not for spot trading. Each trading pair has its own associated available margin/leverage, initial margin rate, and maintenance rate. These can be viewed here.
If the value of the coin then goes up so will the balance in your account. If the value of the coin goes down, so will the balance also. When your total account balance goes below the margin maintenance rate you will receive a margin call to top up the funds in your account to reach the minimum margin, or the exchange will liquidate your position.
Profits and Losses (PnL)
If you want to buy BTC and have $10, with 10X leverage you would be able to buy $100 of BTC. Imagine $100 bought you 1 BTC. If the price of BTC then went up so that 1 BTC was now worth $150 the profit is $50. If you close this position now, you will get $50 + your initial $10 back into your account.
Conversely, take your same $10 with 10X leverage and buy that 1 BTC. If the price of BTC then goes down, this is where the maintenance margin rate will come into play. The maintenance margin rate (MMR) of BTC/USD at Phemex is 0.5%, this means that the maintenance margin is 100 x 0.05 + 90 = $90.50. This means that if at any point the value of your 1 BTC goes below $90.50, you will be on margin call and asked to either deposit more currency to bring the balance up to $90.50 or liquidate the position. The entire margin of $90 that was lent to you will get returned and you will get back $0.50.