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About Margin Trading
Updated at:1218 days 2 hours ago

About Margin Trading

On Gate.io, investors can use their crypto assets as collateral to borrow great sums of capital. Investors must repay the loans within the time limit. Leveraged trading is similar to securities margin trading in the stock market. Investors use leverages to amplify profits while also amplifying risks.

Margin trading vs. futures trading


How to conduct margin trading


Lee thinks that the BTC market is looking very bullish in the coming month. In order to obtain higher profits, Lee plans to trade on margin. Lee's account has 10,000 USDT and he wants to borrow 10,000 USDT in order to double the return. First, he transfers 10,000USDT to his margin account as collateral. (Collateral: The funds investors deposit as an agreement to obey the trading rules. Only after the collateral has been transferred to the margin account can investors start borrowing funds.)

Then Lee chooses the loan period and interest rate and he borrows 10,000 USDT, whose repayment is due in 30 days with the daily interest rate being 0.02%. Lee bought 4 BTC at the price of 5000USDT each. 25 days later, the price of BTC rises to 10,000USDT. Lee sold all the BTC and repaid his margin loan in advance. Compared to trading with no leverage, he made an extra profit of 9,950USDT.

Comparing profit

Profit from margin trading: [10,000USDT (initial collateral)+10,000USDT(margin loan)]/5,000USDT(BTC buying price)*10,000USDT(BTC selling price)-10,000USDT(initial collateral)-10,000USDT*(1+0.02%*25)(margin loan & interest)=19,950USDT

Profit from trading without leverage: 10,000USDT (margin)/5,000USDT(BTC buying price)*10,000USDT(BTC selling price)-10,000USDT(margin)=10,000USDT

We can tell from the calculation results that trading with leverage made Lee 9,950USDT more profit than without.

Say Lee thinks that the BTC market is looking bearish in the coming month. He transfers 10,000USDT into his margin account when the price for one BTC is 5,000USDT. He borrows 2 BTC and sells them to get 10,000 USDT. 25 days later, the price for one BTC rises to 9,100USDT. Now Lee needs to give out 18,200USDT for 2 BTC to pay off his loan, which means Lee's balance reduces from 20,000USDT to 1,800USDT. Lee loses 8,200USDT. At this point, the risk rate of Lee's account is lower than 110%. Forced liquidation is triggered to stop further loss.

*Risk rate = total balance/loan volume *100% When Lee gets the loan: Risk rate = 20,000USDT(total balance)/[5,000USDT(BTC buying price)*2(number of BTC borrowed)]*100%=200% 25 days later: 1BTC=9100USDT Risk rate = 20,000USDT(total balance)/[9100USDT(BTC selling price) *2(number of BTC borrowed)]*100%=109.9%

The lower the risk rate, the higher the risk. When the risk rate falls below 110%, forced liquidation will be triggered.

If the price of BTC goes down as Lee predicts, when the price reaches 2,500USDT, Lee buys 2 BTC to repay the loan. Now Lee's net balance is 15,000USDT(interest and handling fees not calculated). The price of BTC halves but Lee makes a profit of 5,000USDT. The reward ratio is 50%, which means you can make huge profits from trading in a bearish market too. Lee comes to the following conclusion: By introducing leverage, spot trading can amplify returns when the market moves in the same direction as the investor predicts. The investor can profit by trading with leverage in a bearish market too. But if the market moves in the opposite direction as the investor predicts, the loss will also be amplified accordingly.

How can investors manage their finances?

The idle assets in the account can be used for margin borrowing to generate extra revenue. When lending through a Gate.io financial management product, lenders can decide the loan amount and interest rate.

Are the loaned assets safe?

The loaned assets will be used by users of Gate.io to conduct margin trading. Gate.io guards the safety of financial management funds through a comprehensive risk control mechanism.

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