What is margin trading?
Margin trading is the term not so uncommon in the realm of the stock exchange and Forex trading. It has always been a family of them for experienced traders, especially in markets that are slow to change.
Margin trading simply means that you can, as a trader, expand on your scope of possibilities by borrowing some amount from the exchange itself based on the capital that you have.
In short, margin trading, or leverage trading as it is sometimes referred to, is a facility provided by any exchange to help a trader open up positions that might be beyond their reach if they traded only with the capital that they possess.
What is Crypto Margin Trading?
Leverage trading, which was once largely confined to slowly changing markets like Forex and stock exchanges have not made its way into the cryptocurrency exchange realm. This opens up a plethora of opportunities for experienced traders.
Deriving from the classical definition of margin trading, crypto margin trading can simply be defined as a training method with which a cryptocurrency exchange lets a trader borrow some capital from the exchange itself. This borrowing is intended to increase the buying power of the trader. This can help open positions that were earlier inaccessible to the trade or if they were to trade just with the capital that they had.
Margin trading is alternatively referred to as leverage trading. Margin, by definition, is the capital that the trader has in the first place, and the leverage is the amount the exchange gives as a loan to the trader.
Any cryptocurrency exchange with margin trading has its own terms to dictate it’s on leverage. The leverage is expressed in terms of a multiplier. The multiplier can be something as small as 2 X to something as massive as 200 X. The multiplier basically means that the exchange lawns that amount for the trader. If an exchange offers a leverage of 10 X, it basically means that if a trailer has a capital of $10, they can trade positions that are worth $100.
How Do Crypto Margin Trading Exchanges Work?
How a crypto margin trading exchange works is simple and straightforward. In fact, it is the intricacies in every individual trade that make the difference in terms of difficulty for the trader.
For a traitor to perform margin trading, one of the first requirements is to deposit an initial amount to open a position. This amount, as we earlier discussed, it’s referred to as the initial margin. To continue trading with leverage, any trader has to maintain a certain minimum amount in the deposit. This amount is referred to as the maintenance margin.
Once you have understood these concepts, trading using a leverage crypto exchange is simple. Let us take, for example, that the price of one bitcoin is $100, and the price increases by $10. If you were to have a capital of $100, you can sell your bitcoin at an increased price, reaping a profit of $10. However, if your exchange gives you a 10 X leverage, you can, instead of buying just one bitcoin at $100, by 10 bitcoin valued at $1000. Therefore, when the price of the bitcoin increases by the same $10, you can make a profit of $100. The $900 that you borrowed from the exchange can be returned with a small interest.
The interest that you paid for the exchange increases the avenues of profit called the exchange as well. An experienced and seasoned cryptocurrency trader can make a big profit out of these leverage exchanges.
To understand the nuances of leverage trading, you will need to familiarize yourself with certain terminologies like shorting, leverage, liquidation price, and margin calls.
A margin call occurs when the value of an asset in a margin trade plunges down below a certain threshold. Liquidation is an act performed by the cryptocurrency exchange in an endeavor to protect its own assets. If a margin level position becomes too insecure, the exchange automatically closes a position, so only the capital that is deposited by the trader is lost.
Shorting or short trading is an exclusive feature of a cryptocurrency exchange with margin trading. Traditionally, you buy a certain assetand sell it at a later point in time when the price of an asset is sure to go up. If there is an asset identified, and if the trader is sure that the price of the asset is going to diminish, they can do nothing about it. However, with short trading, you can technically sell a crypto asset right away and buy back the same asset at a certain point in time when the price is lower.This difference in price accounts for the profit that the trader makes.
Why Should you Build a Margin Trading Crypto Exchange?
No innovation can continue to exist without giving substantial business advantages. There are quite a lot of business advantages brought about by a cryptocurrency exchange with leverage.
The first and foremost advantage that it’s also the most obvious one is it lets your traders scale their position by a considerable proportion. This advantage is brought about because crypto traders now have secondary markets that are large enough to provide the liquidity needed in cash digital coins that they possess. Crypto assets like security tokens and stable coins have elevated the possibility of trading crypto assets to a different level, and this has enabled margin trading become more common in almost all famous and noteworthy cryptocurrency exchanges.
We have earlier seen what shorting, or short training is about. It looks like a lucrative business opportunity for a trader because they do not have to exclusively depend on assets that will increase in value. They can also make a profit out of assets that are quite likely to decrease in their value as well. The possibility of short training is exclusive to cryptocurrency exchanges with margin.
It also presents an additional avenue for revenue for cryptocurrency exchange businesses. The small interest that a cryptocurrency exchange earns by loaning the leverage amount to the trader also counts as profit. Although the interest amount might seem small, it becomes voluminous because of the sheer number of traders who use this feature.
If all the advantages in margin trading exchange development were to be summed up, it can be done in four points: a pronounced ratio of better returns, progressive API integrations, building a long-term profit-making system, and the flexibility to re-organize and distribute trader funds.
Essential Components of a Margin Trading Exchange
Only when you engage in margin trading exchange development will you realize that leverage exchange is the grand culmination of a multitude of features and modules.
It is to be remembered that people who use a cryptocurrency exchange with leverage are not experts in the technology of cryptocurrency and blockchain. They are simply common people who might not have the technical expertise and are purely bent on analyzing the market and making a profit from the fluctuations. Therefore, your cryptocurrency exchange should support a simple, interactive, and intuitive user interface. The entire process of applying your leverage should not take more than two or three clicks. Your cryptocurrency exchange interface should also have facilities like stop order and limit order easily accessible.
A good measure of the simplicity of an exchange in its useability is how easily a first-time trader finds their trade options.
Cryptocurrency exchanges are considered the weakest link in the security of the crypto ecosystem. It largely stems from the fact that unlike the governing technology behind cryptocurrency, cryptocurrency exchanges are largely centralized. Therefore, ensuring top-notch security is something that every cryptocurrency exchange with leverage needs to achieve beyond any degree of compromise.
Simple features like using a multi-signature wallet and two factor authentication can help in strengthening the security to a considerable extent. Two-factor authentication simply means that a user can login only after the input a code that is sent to their mobile device in addition to the usual password. A multi -signature wallet is a wallet that requires an approval from at least two devices to authorize a transaction. This will ensure that even if one of the devices of a trader is compromised, the transactions will not go through because the malicious user does not have access to the other device of the trailer. This effectively prevents all the threats that happen because of social engineering.
Your cryptocurrency exchange should support advanced order types. The different types of advanced orders include stop limit buy order, stop loss and take profit order, stop loss and take profit limit order, trailing stop buy/sell order, trailing stop limit buy/sell order, and a lot more of them. These orders bring the simple logic of if-then-else statements to the realm of crypto trading.
Your cryptocurrency trading exchange should also have the properties essential for risk management. It is an undeniable truth that the possibility of profit increases when you trade with your leverage. Proportionally, the possibility of losses also increases in an endeavor to reduce the possibilities of losses, there should be mechanisms like stop loss. Introducing options like filtering of trades by using the historic risk to reward ratio can help in minimizing the magnitude of risk.
Cryptocurrency Margin Trading Strategies
There is no one-size-fits-all strategy for cryptocurrency trading. However, some techniques have managed to stand the test of time and have established themselves as dependable strategies for cryptocurrency trading and making a profit out of it.
One of the tips given by crypto trading experts is to progressively increase the tread size. It not only suggests that you should increase the possibility of profit with every passing day, but also that you should start small to begin with. This is not just about your capital but also about your leverage.
There are a lot of cryptocurrency exchanges that have a demo trading mode. Using this demo trading, alternatively referred to as paper training, you can practice training techniques in a virtual trading environment. You do not have to spend real money, and just as you would expect, you will not make real profits either. However, using this method, you can test the waters before you jump into investing real money into cryptocurrency trading.
The golden and evergreen rule, not just with but with almost every possible type of training is that you should never put all your eggs in a single basket. Going by this rule, it is strongly recommended that you spread your position into diverse channels. This will ensure that even if you lose your money in one trade, we will make a profit in the other, at least bringing your losses to zero!
Most cryptocurrency trading engines with leverage provide you with different order types like stop loss and take profit. These options help you in minimizing the risk of your trade. It is strongly recommended that you understand these different order types before you embark on trading with your leverage exchange.
Cost of Building a Cryptocurrency Exchange with Leverage
Building a cryptocurrency exchange is a capital intensive process. There have been a lot of instances of cryptocurrency exchanges frizzling out midway because they did not have enough capital to keep going. There is no question that cryptocurrency exchanges are profitable business models. However, before they turn completely profitable, it is mandatory that you will need to churn some money.
The costs involved in margin trading exchange development includes but is not limited to the cost of development, associated coding, testing, and quality control, operations management, marketing, and legal compliance. Most of the exchanges do not employ more than ten people to take care of all these aspects. Even some of the biggest exchanges like Binance operate with no more than forty people as a part of that mainstream workforce.
Developing an exchange from scratch might cost you quite a lot of money and time. Since the cryptocurrency exchange is a complex manifestation of cutting edge engineering, it is also possible that you might end up with a product with a lot of bugs.
To counter this challenge, you can consider using white label leverage exchange solutions. Since these products are available off-the-shelf, you can be assured that you will not face a lot of bugs to fix. Most of the white label cryptocurrency exchange development companies, in addition to providing the product, also provide customization services.
If you are one of those aspiring entrepreneurs who would like to create a profitable business out of a cryptocurrency exchange, all you need to do is get in touch with a white label cryptocurrency exchange development company that specializes in leverage exchange development. They will take care of not only to understand your requirements but also customize the product according to your business needs. This will ensure that you are primed and ready to launch your cryptocurrency exchange business at the earliest!