Traditional investors in stock or securities will already be well acquainted with margin trading. But in the forever evolving world of cryptocurrencies, crypto margin trading has developed an entirely need investment vehicle for day-traders, crypto funds and general crypto investors.
What is Crypto Margin Trading?
Its core purpose is to boost the investment value or trading results to reach greater profits by having access to additional capital, usually through third parties. Ultimately, these investors take advantage of market swings due to volatility, which creates an opportunity for lucrative trading strategies.
The primary advantages are:
- Ability to generate higher profits with additional capital
- An opportunity to obtain capital on loan to use as leverage for an investment position
- Take advantage of speculative and investment strategies to generate profits
- Strategic margin trading can be used for diversification with only small amounts of investment capital.
How does Crypto Margin Trading work?
Traditionally when margin trading, an investor will borrow capital from a broker, but this is not the case for cryptocurrencies. The capital is generally provided from other traders, which earn interest based on the market’s demand for margin fund trading activity. But in the coming years, there will be an injection of more funds adding cryptocurrency into their portfolios.
The opportunity to generate large profits can be an exciting opportunity, especially during times of great speculation, which is prominent in cryptocurrencies. However, there is an equal opportunity to lose more than what an investor initially put in. Should an investor place $50,000 into an investment, but 50% is “loaned” capital, that investor not only loses their initial 50% of $25,000, but they also owe their broker the remaining $25,000 to top it off. This is why trading on margins requires strategy and technology.
It is important to know that margin trading comes with high risks. Even a small change in market price can result in heavy losses for traders, but the benefits can often outweigh the high-cost risks and provide lucrative returns for funds. The fund operators are well acquainted with these risks and are true professionals. For most investors, only risk capital that can afford to be lost.
Can anyone trade with crypto margins?
In order to margin trade with cryptocurrencies, investors need to provide explicit approval to open this type of account, for example, with a crypto exchange like Binance or Coinbase.
But, due to high volatility and the complexities of understanding the markets and analyzing trends, it is recommended for only avid investors or professionals. It is therefore important to develop a deeper understanding of the markets mechanics before plunging into marginal trading for crypto. It is always recommended to confer with a professional margin trader or crypto investor before committing to this complex but lucrative investment strategy.
Crypto Accounting & Tax
For crypto accountants and tax professionals, many of their clients that engage with cryptocurrency margin trading face a variety of immediate challenges. The lingering lack of legal framework over cryptocurrencies has not classified the tax implications of margin trading, but that will change in 2020 as increased regulation continues unfolding.
For more news, updates and trends on crypto accounting and tax, come visit the Blox blog.
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