Being Smart About Crypto Margin Trading

in cryptocurrency •  2 months ago

There are many people on all kinds of social media platforms (especially Twitter) that use margin exchanges in a way to basically gamble their savings away. Margin platforms can be an valuable tool to use to further your trading, however they can also leave you with big losses and a burnt account.

Example #1 - Protecting the value of your spot exposure

Let’s say you own 1 BTC in cold storage that you’d like to keep for the long-term but you feel like BTC is going to take a nose dive short-term and would like to reduce your exposure to it.

You could:

Sell your Bitcoin by:

  1. Connecting to your wallet
  2. Sending the BTC to an exchange
  3. Selling it to USD
  4. Withdraw that USD
  5. Wait for better times
  6. Rebuy the BTC
  7. Send it to your wallet

Ooooor you could:

Sell the equivalent of your spot BTC on a margin trading platform by:

Sending 0.33 BTC to the platform
Short 1 BTC by using x3 leverage

This way you keep your BTC storage, avoid all the transaction hassle while still being in USD (Equal short and long position). If BTC goes down? Your margin account grows while your storage value decreases. BTC goes up? Your margin account shrinks while your storage value goes up. You avoid most of the work while still being in the same position. The only thing you need to worry about is fees.

Example #2 - Protecting your alts from BTC downmoves

Let’s say you’re bullish altcoins while still being bearish on BTC.

You can short BTC on the margin trading platform while keeping your alts in the market. This is what happened in December last year.

BTC crashed while alts mooned, you could have made money on both sides of the trade.

What would’ve happened if the trade went the other way?

You would've lost money. This strategy is only ever applicable during alt seasons.

The ratios need to pump while BTC is retracing, that only happens at the tail end of an altcoin market. If you’re wrong and alts go down you lose money, if you’re right and alts go up you make money. You can also do this when BTC is bullish. Margin long your altcoin exposure away.

Example #3 - Protecting against counter party risk

Lets say you want to trade but you don’t trust exchanges with your money, margin platforms can be an excellent tool to use. If you’re trading 1/3 of your crypto allocation on x3 on a margin exchange, the amount you risk (if the exchange goes under) is only a third of what it would be if you traded your spot on it.

Example #4 - As an experienced professional trader

If you know what you’re doing margin trading can be insanely profitable

Remember though, no risk management = get reked over the long run, no matter how smart you think you are.

Don’t be an idiot and chase the big money, go at it slowly and do it the right way. Add small increments to your position before you go all in on one trade.


What not to use margin trading platforms for:

Example #1 - Increasing your position size so you can make more money

Let’s say Bob owns 1 BTC and feels like selling and buying that 1 BTC isn't making him enough money, so he transfers it to a margin exchange to trade with 10 BTC while ignoring is tolerance for risk.

Bob is officially an idiot. A smart trader usually risks ~2-3% of his balance on trade. That means Bob would stop out of his 10BTC trade after only a 0.2-0.3% move.

It’s easy to see why Bob is a moron. Don’t be like Bob.

Example #2 - You're losing money trading altcoins and are trying to make it back while margin trading

This is not only substantially harder than trading altcoins, you’re also revenge trading. One of the simplest and fastest ways to your money. If you haven't tuned your risk management, formulated a trading strategy or downside protection plan it will be very easy for you to be stopped out or just end up having to liquidate. If you want to start somewhere transfer a low amount ($10–$50) to BitMex / Deribit / Bitfinex and trade those for a while.

Start off small with your strategy. Once you see it working slowly add to your position size.

Example #3 - Everyone is doing it

Crypto is already volatile, there is no need for the average Joe to start leveraged trading other than if they want to start hedging. Too many people lost their money over the last year because BTC MOON and Lambo whatever. Don’t be an idiot, stick to small position sizes until you’re comfortable. No reason going broke trying to margin.

Bob dies in markets like these. Don't be like Bob.

Stay smart. Be careful. And don't margin more that you can accept losing.

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