Margin Trading, Explained | Crypto
This is where you make trades using money borrowed from someone else – or a brokerage.
While the potential rewards can be high, there are some sizeable risks that investors need to contend with too.
As you’d imagine, the principle in the cryptocurrency world is quite similar. Let’s say you want to buy Ethereum worth $1,000, but you’ve only got $500 available. Through margin trading, you’d be able to borrow an extra $500 – getting you up to the magic total.
If your $1,000 in Ethereum grew in value, to say $1,500, you’d be able to liquidate it and return the $500 to the lender, leaving you with a gross profit of $500.
Of course, the value of cryptocurrencies can go dramatically down as well as up. In a scenario where the price of Ethereum went down by 50 percent, your lender would be able to get their $500 first before you can access funds, potentially leaving you with nothing.