Spotlight on Poloniex: The Legendary Crypto Asset Exchange (Part 2)

Challenge entry: Margin trading on Poloniex

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Hello everyone. I'm talking about Poloniex again. I began this 'spotlight on Poloniex' series with perhaps the primary duty of any crypto exchange - 'Exchanging on Poloniex'. In this second part of the series, I'll be doing a detailed examination of one of Poloniex's advanced trading options known as 'Margin Trading'.

Here's what to expect in this second part of the series

1. Overview
2. Margin trading
   i. margin accounts
   ii. margin account terminologies
   iii. positions
   iv. forced liquidation
   v. How to margin trade
3. Conclusion

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Overview

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Poloniex, in addition to the normal exchanging or trading, offers some advanced features. Being a leading, as well as an old exchange in the industry, Poloniex boasts of some advanced features obtainable in any other top notch exchange and even more. Having started in 2014, Poloniex went on to gain grounds in the crypto exchange industry, reaching a record $1.65bn dollars in trade volume in 2017. And after surviving a potentially reputation destroying hack in 2014 with its reputation intact, Poloniex has laid serious claims to their 'Legendary' status by including advanced trading features, some of which provides really good advantages to its users. On of such is Poloniex's margin trading.

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Margin Trading

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According to investopedia.com,

Margin is the money borrowed from a brokerage firm to purchase an investment. It is the difference between the total value of securities held in an investor's account and the loan amount from the broker._Source

Basically, margin trading means trading with funds that you borrowed from elsewhere. This means that the funds you use in margin trading are not yours but belong to a lender who offered it up for peer-to-peer loans. The collateral you'll use to access these loans is the funds in your margin account. The funds in your margin account can also be used to settle debts if you eventually have any. I'll examine margin trading on Poloniex through the following points - margin accounts, margin account terminologies, positions, forced liquidation and how to margin trade.

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Margin accounts

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On Poloniex, after you sign up, you're given three accounts. The first is your exchange account then you also have a margin account and a lending account. When you deposit or buy cryptocurrencies, they go to your exchange account. Should you choose to margin trade on Poloniex, you'll need to go to the transfer balances page on Poloniex and this is only possible after you've logged in. This is how the view looks like from my account on Poloniex

^{Transfer balances page on Poloniex}

_{The view from my account on Poloniex}

The funds in your margin accounts are used as collateral for securing loans for margin trading as well as for clearing debts. You can only borrow a limited amount of currencies based on your margin account balance. Except otherwise stated by Poloniex, for most currencies currencies, the maximum is 2.5x. This is called leverage.

Kindly note: You can only fund your margin account with currencies for which margin trade is enabled. Source: Poloniex.com

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Margin account terminologies

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There are some terminologies you'll often encounter in your margin account if you decide to go into margin trade. Many of them are used to summarize your margin trading activities. These are stated below.

1. Total margin value: This is the BTC value of all the currencies you have in your margin account. Since it's denominated in BTC, the value can change as the market price for BTC changes.
2. Unrealized profits or loss: Should all your open positions be closed immediately with market orders and the lending fees you're to pay be subtracted from what you realized, what will be left is know as the unrealized profits or loss depending on whether you're making a profit or a loss.
3. Unrealized lending fees: As the name implies, this is the estimated value of the all the interests you currently owe on your active loans.
4. Net Value: This is the sum of your total margin value, unrealized profits or loss (this is either positive or negative depending on if it's a profit or a loss) and unrealized lending fees (this is negative). This is what is used as collateral for loans.
5. Total borrowed value: This is the total value of all your open loans in BTC. Like the margin value, it can change as market conditions change. For other currencies, the BTC value is derived from the amount of the currency need to buy BTC on the current order book.
6. Initial margin: The percentage of the total value you can borrow that equals your net value is called your initial margin. If your initial margin is 30%, any amount you want to borrow, you must have 30% of it in your balance after you must have removed your unrealized losses (if any) and unrealized lending fees (which doesn't belong to you).
7. Maintenance margin: This is the minimum percentage of your borrowed value your net value must be in order to avoid a forced liquidation.
8. Current margin: This is the percentage of your borrowed value that your net value currently is.
   Source

More terminologies and their explanation can be found on this page on Poloniex

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Positions

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Positions are trades a user has made. They are opened when you borrow funds and make a trade. If you sell, it's a short position and if you buy, it's a long position. If you buy then sell, the position changes from long to short. Short positions are always recorded in negative values. When the positions are all closed, the loans are automatically settled.

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Forced liquidation

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When your current margin drops below your maintenance margin, all your current open positions will be automatically closed to prevent you from making more losses such as would make you default on your loans. This is called forced liquidation.

To prevent this, you need to check the market and your open positions regularly. If it's not in your favor, you can add more funds to your margin account to make more collateral available. You may not get a margin call in time so if you fail to regularly do the checks, you might get your positions forcefully liquidated.

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How to margin trade

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To be eligible to margin trade, you must have completed your level 2 verification and you must not be in a restricted territory.

If you're eligible, then do the following.

1. Deposit currencies in your exchange account or buy with fiat.
2. Transfer the amount of currencies you want to margin trade with from your exchange account to your margin account through the transfer balances page on Poloniex.
3. Then go ahead and simply place buy or sell orders. Borrowing is handled automatically.

Here is an example of a buy order

^{A buy order sample}

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From the picture above, the tradable balance is the amount you have to trade with. The lowest ask is the price of BTC you are willing to buy the currency at. The loan rate is the maximum daily interest rate you are willing to pay if your order opens any loans. Since loans are usually accepted at the highest rate, it isn't a bad idea setting a higher rate than the latest rate offered.

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Conclusion

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Margin trading on Poloniex is easier than you think. Borrowing is handled automatically, you only have to place a buy order after transferring the currencies you want to trade with from your exchange account to your margin account. The collateral for borrowing is the cuurencies in your margin account. Excess loss is prevented by forced liquidations. This also helps in ensuring you don't default on your loans. Poloniex however stipulates requirements for margin trading - a completion of level 2 verification and non-residence in any of the restricted territories.

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References:

1. Poloniex