By now, all people know the actual fact that cryptocurrency trading is both risky and rewarding. One needs to be good and learn the basics before putting a considerable amount of money in it.

Picture this :-

You put $10,000 in crypto and some of days later, it's valued at $20,000! Wow!

But you need to understand that there's an equal risk of your initial investment obtaining reduced to $100 in a day or two. Yes, that’s right.

So it becomes vital for us to discuss a very important concept in trading which may be rewarding however also risky – Margin trading. however it’s not all dangerous if you use it properly to achieve your investment goals.

What Is Margin Trading?

Margin trading is an act of borrowing additional money or cryptocurrency by leveraging the number of cryptocurrencies that you just already own to buy additional cryptocurrencies.

Margin trading is also named as margins or leverage trading and the idea is an old age technique used in the traditional markets.

The idea was born in the us and is now practiced in various exchanges around the world and has been incorporated in the cryptocurrency world too.

But in traditional markets, there are several rules and regulations on margin trading, whereas the cryptocurrency margin rules are quite simple and not as difficult. the basic operating principle, however, remains a similar.

Let me provide you with an example :-

Assume, you want to make an investment of $2000 in BTC however you only have $1000. thus now to bring in the extra $1000, you borrow that through the margin of 2:1 (2x, it means that for every dollar you have, you'll get extra one dollar to invest).

Now imagine the BTC value increases 50%, then has your investment. so the $2000 you invested is now worth $3000. you'll liquidate and pay back $1000 to the lender and enjoy your profits of $1000. (Assuming 1 BTC costs $2000)

But on the flip side if the BTC price decreases by 50%, your investment of $2000 has conjointly reduced to $1000. during this case, the lender needs to be protected and he/she has the first right to claim the remaining $1000, thus this goes to the lender. Now, your initial investment of $1000 is also lost and now you're left with nothing.

So you see, this way, margin can be terribly rewarding as well as highly risky and that’s why it's not suggested to margin trade until unless you understand what the risks are.

Who gives This extra money or Crypto Invest & Why?

I know what are you thinking. you're thinking who provides this extra money or BTC to the trader to margin trade and why.

Well, brokers or individuals here act as lenders and provide their money or BTC to margin traders on a fee or interest rate.

And whenever the margin trader’s portfolio performs poorly according to the agreed conditions, their position is automatically closed by the broker to refund and save the lenders so they get their interests and principal first.

On the flip side, if the margin trader’s portfolio performs well, lenders are regularly paid their interests according to the trade terms.

And that’s why it's conjointly known as Leverage trading. for example, 50:1 leverage, means $2,000 of equity/BTC is required to purchase an order value $100,000. 400:1 leverage means that $250 is required to purchase an order value $100,000.

Now, i know some of you might want to know wherever you'll trade cryptocurrencies on a margin.

Well, there are some dedicated margin trading exchanges for doing that.

Always remember one thing – margin trading is not for noobs and you need to take into account the wild volatility of the crypto market too.

That’s why always stick to basic investing principles and never invest more than what you can afford to lose.