As EXMO, one of the leading international cryptocurrency exchanges, is announcing its plan to raise additional investment capital and add a margin loan service to its platform, let us talk about what a margin loan is when it comes to cryptocurrency trading. How do you purchase or sell cryptocurrencies with a leverage, and how do you use stop-losses?
The new feature comes in handy as the volatile swings of cryptocurrencies tend to persist. In fact, such fluctuations may occur within a one-day period, thus having the necessary agility to be able to trade quickly and timely is paramount. It could be frustrating not having enough funds available right there in that sweet spot when purchasing (or selling) a specific currency could make you profit from its growing or falling price.
A Bit of Terminology
If you are unaccustomed with the traditional stock exchange term, under a margin loan you borrow funds from a broker to buy or sell stock. In short, the method allows you to trade more than you would be able to afford with your own funds only. The very term margin refers to a pledge that a trader makes to receive a certain amount of money.
Leverage refers to the actual funds borrowed from the exchange for purchasing cryptocurrency. This comes in the form of a coefficient. For instance, EXMO will be offering 1:2 leverages in a margin loan on BTC, ETH, USD, and RUB, with more options to come in the future as the demand for the service increases. Leverage will be explained a bit more in the examples below.
Stop loss is a type of pending order for closing an open deal partly or entirely when a currency reaches a certain price. It is designed to set the selling price below the market, the price that you would definitely be selling your coins at if the market sinks, in order to limit your deposit loss. In fact, this feature will not be available on our platform just yet, though we are planning to introduce it shortly.
Collateral is a set of liquid currencies that an exchange takes as a pledge for issuing a loan to a user. Not all currencies from a user's wallet can be used as collateral: the most liquid are used in full, less liquid with a lower coefficient, and illiquid currencies are not accepted as security at all. A quality collateral assessment is one of the core jobs of risk-management.
Margin Loans in Action
When it comes to a typical scenario, you start off your trading by registering with a cryptocurrency exchange (such as EXMO). Next you must get verified by the exchange. This involves you providing y information including scanned copies of an ID and other documents if required. The verification procedure is an important step, as the EXMO Exchange, for instance, strictly adheres to the principles of KYC (Know Your Customer), and AML (Anti Money Laundering) international standards. Then you may top up your balance with either fiat money or cryptocurrencies such as BTC or ETH and start trading.
Say you have a $1,000 deposit on your account, and 1 BTC is currently traded at $3,000. Let us review the options that open up to you with the power of a margin loan, as well as get more understanding of leverage.
First, what do you do if you are sure that the BTC will surge in price, but you do not have enough money to buy it? You may consider a long position to earn on the growing price of a certain currency. You use your own money plus the borrowed sum to buy the needed currency amount now and sell it later at a higher price. After the sale of the purchased assets you receive a financially positive result. Thanks to using the margin leverage it turns out to be much bigger than it would be if you had traded with no borrowed funds.
Example 1: You use your $1,000 with a 1:3 leverage. This means that you can buy with the amount of money 3 times higher than what you possess. Say you are able to get 0.333 BTC with your own funds, and now you can purchase 1 BTC for $1,000 x 3=$3,000. Sell your BTC when it reaches $3,500 and you have a profit of $500, instead of the $155 that you could receive from selling just the 0.333 BTC that you could initially afford.
Alternatively, you can earn while a currency is losing value, which is called a short position. The profit here comes from selling the borrowed amount of cryptocurrency and purchasing it later when its price drops. This kind of profit would be impossible without the margin loan feature.
Example 2: You are expecting the BTC price to go down. The price of BTC still stands at $3,000 and your balance is still $1,000. So, you pledge in your $1,000 and borrow 1 BTC with a 1:3 leverage to sell it immediately. You purchase it back when 1 BTC = $2,000. The 1 BTC that you borrowed is automatically returned to the exchange, and you are left with the 0.5 BTC profit.
When does the stop-loss feature come to rescue?
Let`s get back to example 1 when you could get 1 BTC for $1,000, while the actual price was $3,000. Imagine the BTC price drops to $2,000. If you were to buy 0.333 BTC for $1,000 initially, your loss now would be about $334. If you were to use the 1:3 leverage to acquire the whole BTC it would be triple that, so you would lose the whole deposit. Thus, if you set the stop-loss price at $3,000, the exchange will automatically sell your bitcoins in case their value drops lower than that. This feature helps preventing the complete loss of your deposits.
The Crowdsale to Amplify the Margin Loan Adoption
To cover the increasing demand for margin loans among traders, EXMO, the established cryptocurrency exchange with over four years of successful trading experience, has announced the launch of a token sale. EXMO will attract additional investment capital by issuing its very own token called EXMO Coin (EXO).
Anyone can become an investor / an EXMO Coin token holder — Token sale starts on November 6, 2017.
The crowdsale will bring a whole new trading experience to over 630,000 loyal traders around the globe and numerous new ones, enabling them to trade cryptocurrencies on a bigger scale than they would be able to afford with their existing money. At the core of the upcoming token sale is an endeavor to give the already profitable platform an additional boost for rapid development.
Investors, or token holders, are promised to receive 50% of the revenue derived from margin loans distributed among them in the form of dividends on a monthly basis. Following the sale, the EXMO Сoin will be traded on the EXMO Exchange along with other currencies in pairs such as EXO/BTC and EXO/ETH, and a later on with other currencies like USD and EUR, as well as other altcoins, thus constituting another lucrative asset for its holder. On top of that, EXMO announced the guaranteed token buyout, outlining the corresponding conditions and dates in the White Paper.