You’ve probably heard stories about people who made a fortune with a small amount of capital and made considerable gains in traditional or crypto markets. But, there are also many stories about people, even famous institutions, who had substantial losses due to the mismanagement of their assets. They use leverage when trading or investing, making several times the profits when the market changes in the expected direction and taking more significant losses when the trend is the opposite.
If you’ve been in the market for a while, you’ve probably come across the terms “leveraged trading” or “margin trading”. The main distinction between margin trading and spot trading is that spot trading is where the buyer and seller pay at the delivery, with no debt to each other.
In contrast, leveraged trading (margin trading) allows the buyer or seller to buy or sell with several times the number of assets they hold, taking on some of the liabilities that must be returned while also gaining the opportunity for higher returns.
Margin trading is critical for traders and investors in various financial markets. Leverage not only improves capital efficiency and increases return on investment, but it also hedges the risk in an uncertain market. However, margin trading can result in significant losses for traders if misused. Understanding the principles, benefits, and drawbacks of margin trading can help you use your assets more effectively and develop diverse investment strategies.
Margin trading, also known as buying on margin, is a type of trading in which traders borrow funds to trade more prominent positions. Borrowed funds are typically provided by the exchange or by other users matched by the exchange.
Margin trading employs assets other than the user’s own, such as those provided by the trading platform or other users, resulting in a financial leverage effect. With leveraged trading, you can trade for $300 or even $1,000 if you only have $100 in your account wallet.
Because margin trading involves using other people’s funds, margin traders must provide a margin as a guarantee of repayment in the event of an accident to avoid losses to the platform or other users. Suppose a margin trader’s investment fails, and there is a risk that the margin will not cover the loss. In that case, the user must make a margin call or risk the platform liquidating and forcing the sale of the position and forfeiting the margin to cover the amount owed.
Users of margin trading who borrow money to invest from the trading platform or other users must pay interest regularly. However, because margin trading allows people to manipulate more money, the results of the trade can be magnified, allowing traders to profit more from a successful trade.
Margin trading is trading by pledging your assets as a margin and borrowing several times the guaranteed funds to achieve the effect of making a big difference with a small amount of money. The process of margin trading consists of the following four steps:
Transfer funds to your Margin Trading Wallet.
Bitcoin, for example, is currently worth $20,000 on the open market. User A is bullish on Bitcoin’s performance in a month and intends to buy long before the price rises and then sells at a higher price for a profit. Even if the price of bitcoin doubles in a month to $40,000, buying 0.1 bitcoin in a spot trade and selling it again will only result in a $2,000 profit.
User A decides to use margin trading to increase his return. He first transferred $2,000 to his Margin Wallet account as a margin, then borrowed another $18,000 from the lending market for 30 days at 0.02% daily interest and used both his $2,000 and the borrowed $18,000 to purchase one bitcoin.
After 25 days, the price of Bitcoin rises to $40,000, as predicted by User A, at which point User A sells the 1 Bitcoin he purchased. After returning the $18,000 loan and $90 in interest, he is left with $21,910, which, after deducting the principal of $2,000, gives user A a profit of $19,910, nearly ten times what he would have made if he had traded without the leverage.
However, the magnified return multiplier of leveraged trading is proportional to the risk. If User A uses $2000 as a margin and purchases one bitcoin at $20,000, and the bitcoin falls to $18,000 rather than rising, User A’s position loses $2000. To prevent the price of bitcoin from falling further, and User A cannot repay the money owed, the trading platform forces User A to sell his bitcoin position and forfeit the margin to avoid losses to the fund provider.
Although the bitcoin price only falls by 10%, the platform liquidates User A’s account. It loses 100% of its principal because the margin amount in its account is no longer sufficient to cover the loss in value of its position. If User A had not been greedy and only purchased 0.1 bitcoin spot for $2,000, he would have lost only $200 when the price dropped, which is only 10% of his initial investment, demonstrating that margin trading not only magnifies gains but also multiplies losses for the user.
On Gate.io, margin trading is simple and allows users to trade both long and short and to profit from margin trades on both the upside and downside. Before you begin trading with leverage, you must understand the following standard terms to understand how margin trading works and the risks involved.
Leverage is the amount of money you borrow from an exchange platform or another user. As a ratio to the margin provided, if you transfer $100 to a margin account and then use only $50 to buy a spot position, you are still using your assets and have not borrowed, so it is treated as a spot trade.
However, if you use $300 to buy a spot long, you have borrowed $200 from the market in addition to the $100 in your margin account wallet. In addition to paying interest, the platform will force the user to close the position and return the amount owed if there is doubt that the borrowed funds will not be repaid due to changes in market prices.
Margin is the user’s promise to repay the loan when trading with leverage. Suppose the value of the margin is insufficient to cover the trading losses. In that case, the platform will liquidate and close the position to protect the borrower’s rights and interests. If the user wants to continue holding the position, they must either add a margin or reduce the position to repay the loan themselves to reduce the risk.
Isolated Margin Mode and Cross Margin Mode are two trading modes that differ depending on whether the margin is independent of other leveraged positions. The Gate.io platform defaults to Isolated Margin Mode, which requires users to transfer the margin to each margin account wallet of each pair before trading with leverage.
To trade BTC and ETH in Isolated Margin Mode, you must transfer your margin to the BTC and ETH Isolated Margin accounts, respectively. If the ETH position is blown up due to insufficient margin, the BTC position will not be blown up. It is suitable for beginners due to the controlled risk, but managing the margin when trading multiple currencies simultaneously is more complex, and the capital utilization rate is lower.
Cross Margin Mode employs a shared margin model in which you transfer your margin to the Cross Margin wallet before trading. Any unrealized profits from the position you hold can be used directly as a margin for another pair, thereby linking the profit and loss of the various positions.
For example, if you want to trade BTC and ETH with Cross Margin, you can open a position in both BTC and ETH by transferring your margin to the Cross Margin wallet. The value of the BTC and ETH positions are part of each other’s margin, so if the ETH position is liquidated, the BTC position will also be liquidated.
Cross Margin is simple and has a high capital utilization rate for multi-currency trading. Still, the exposure can extend to the entire Cross Margin wallet balance. A single failed trade can reduce assets to zero, so it is best suited for institutional or experienced traders.
The base currency, or the transaction currency, is the asset people buy and sell in the cryptocurrency market. In the case of the BTC/USDT pair, BTC is the base currency. The cryptocurrency market quotation is expressed in terms of how many units of the base currency can be exchanged for one unit of the denominated currency.
The quote currency is used to determine the value of the base currency so that people can compare different base currencies, also known as the settlement currency, target currency, or counter currency. For example, the denominated currency in the BTC/USDT pair is USDT. The cryptocurrency market’s quoted price indicates how much counter currency must be spent to convert to one base currency.
When trading with leverage, borrowing the denominated currency and converting it to the base currency going long. Take the BTC/USDT pair as an example. If the user determines that the price of BTC will rise, he can borrow USDT to go long in BTC and convert it back to USDT to earn the difference after BTC rises.
The borrowing and repayment currencies are the same, so if a user borrows 100 USDT to go long on BTC, they only need to return 100 USDT plus interest when they repay the loan and keep the rest of the profit.
When trading with leverage, borrowing the base currency and converting it to the denominated currency is short. In the case of the BTC/USDT pair, for example, if the user determines that the price of BTC will fall, they can borrow BTC and exchange it for USDT to go short and then exchange it back for BTC after the price of BTC has fallen to earn the difference.
The borrowing and repayment currencies are the same, so if a user borrows 1 BTC to short USDT, they only need to return 1 BTC plus interest when they repay and keep the rest of the profit.
The assets are available to the user in the margin wallet for placing orders, including the transferred and debited portions.
Borrowable assets represent the value of the cryptocurrency that can be borrowed through a margin wallet using transferred assets as a margin. The amount of borrowable assets varies depending on the pair, Isolated Margin, Cross Margin, and lending market pool.
On Gate.io, Cross Margin Mode is 3x the value of the margin (3X), while the Isolated Margin is 3x, 5x, and 10x the value of the margin (3X, 5X, 10X), depending on the pair and the depth of the market.
Since the borrowed assets for margin transactions are from the lending market, the pool will become illiquid when many users borrow. It may only be able to continue borrowing if the margin is sufficient.
Use transferred assets as a margin for cryptocurrencies already borrowed through a margin wallet.
The cryptocurrency in a margin account that the user can no longer use to place orders, generally the part of the order list located in “Current Orders,” that the user has locked out of the platform because of a pending limit order.
It is a metric used by the Gate.io platform to assess the risk of a margin account blowout and represents the ratio of total assets to borrowed assets in a margin account.
Risk rate = Total Assets / Total Liabilities = Total Assets Fund Borrowed Fund + Interest Outstanding
A more considerable value of the risk rate indicates a lower percentage of borrowed assets and a position held less likely to blow up. If there is no borrowing, the liability is zero, and the risk ratio is treated as a spot trade with an infinite value.
Conversely, a smaller value of the risk rate means that the higher the percentage of borrowed assets, the more likely a position is to be closed. Suppose the risk ratio is close to 1. In that case, the total value of assets almost equals the total value of liabilities. The platform will liquidate the user’s position to pay off the borrowed funds to avoid a situation where the margin trader becomes insolvent. In addition, if the risk ratio is too low, the user will be limited in their actions.
When the risk rate of a leveraged margin is < 110%, the system will liquidate the account and use all assets in the account (held positions + margin) to repay the borrowed currency.
A price calculated using a risk rate of 110% indicates the price at which a position will be closed. Currently, 3-5X leverage is subject to forced liquidation when the risk ratio falls below 110%, while 10X leverage is subject to forced liquidation when the risk ratio falls below 105%.
What are the situations where margin trading could be used instead of just spot trading? In general, there are several primary application scenarios for margin trading:
You can not be shorting in Spot trading. Suppose you believe the price of Bitcoin is too high today. In that case, you cannot short unheld cryptocurrencies unless you already hold Bitcoin on the spot or use a financial derivative instrument such as a futures contract (perpetual, delivery).
Users can use spot margin trading to borrow spots from the platform or other users to sell and then buy back to repay when the price drops, allowing them to profit from shorting cryptocurrencies.
Margin trading allows users to borrow funds, increasing their purchasing power and magnifying the profit and loss results of spot trading. Because the daily exchange rate variation between currencies of different countries is often less than 0.5%, profits are limited even if the market is correctly predicted, and the time cost of waiting for trading opportunities to arise is too high in low-volatility markets (such as the international foreign exchange market).
However, in highly volatile markets such as cryptocurrencies, speculative traders frequently use leverage to get rich quickly, multiplying the already dramatic rise and fall of cryptocurrencies to get a hundredfold return with a small amount of money.
Professional investors or institutions can also use spot margin trading to hedge their risk. The core concept of margin spot trading is the borrower must repay the funds, and the provider of the funds (the platform or another user) does not bear the risk of the borrower’s transactions failing, resulting in a reduction in the number of currencies lent and the borrower being required to pay additional interest.
In relative terms, as long as the borrower can repay, they can borrow money to buy or sell large amounts at favorable prices using margin trading to hedge against price fluctuations or lock in profits. For example, if you own a BTC miner or run multiple ETH-pledged nodes, a drop in cryptocurrency price may decrease revenue or even cause a loss. In this case, you can use spot margin trading to short BTC or ETH and sell it to cash out your future earnings before the price drops, after which you can repay the loan.
Arbitrage trading is considered a low-risk strategy that exploits market inefficiencies as the basis for profit-making. If bitcoin prices differ between exchanges A and B, you can buy from the lower-cost exchange and sell on the higher-cost exchange.
You can also use margin spot trading for futures arbitrage, in which you buy spot and sell futures when the futures market price is higher than the spot, and vice versa when the spot market price is higher than futures.
Generally speaking, the yield of arbitrage trading is meager. Still, the advantage is that you do not have to take liquidity risk, and using spot margin trading to buy or sell can effectively magnify the return.
Step 1: Log in to your Gate.io account. Click on “Margin Trading” under “Trade” on the top navigation bar. You can either choose the “standard” or “professional” version. This tutorial uses the standard version.
Step 2: Search and enter the pair you want to trade. (GT_USDT as an example here)
Step 3: Click on “Funds transfer” and proceed as follows
① Determine the transfer direction.
② Select the coin to be transferred.
③ Enter the volume of the transaction.
④ Click on “Transfer Now”.
Step 4: Click on “Get loan” to borrow GT or USDT. Here you can view the loans of your account.
Step 5: Choose from “buy” and “sell” according to which currency you have borrowed. Set buying/selling prices and buying/selling amount (or exchange total). You can also click on the last prices on the order book to set the buying/selling price conveniently. Then click on “Buy”/“Sell”.
(Note: The percentages under the “Amount” box refer to certain percentages of the account balance.)
Step 6: Confirm the price and amount. Then click on “Confirm Order”.
Step 7: After successfully placing an order, you will be able to view it in “My Orders” at the bottom of the page. You can also cancel the order here by clicking on “Cancel”.
Step 1: Open the Gate.io mobile app and log in to your account. Click on “Exchange” on the bottom navigation bar, then “Leverage”.
① Select the pair you want to trade.
② Here it shows the leverage ratio of the current trade. Click to manage your margin account.
③ Click to transfer funds, borrow or repay loans. Alternatively, you can also click on the icon to transfer funds.
④ Entrance to the candlestick chart of the chosen pair.
⑤ Auto-borrow: Once enabled, if the available balance of your margin account is less than the order amount, funds will be borrowed automatically to make sure the transaction will be carried out. Interest will start to accrue immediately when the borrowing is successful. Auto-repay: Once enabled, when the order has been fully filled or partially filled and then canceled, the currency you bought will be immediately used for repayment according to interest rate priority and time priority.
Step 2: Before conducting a margin trade, users need to transfer collaterals first:
① Determine the transfer direction.
② Select the coin to be transferred.
③ Enter the volume of the transaction.
④ Click on “Transfer now”.
Step 3: Choose from “buy” and “sell” according to which currency you have borrowed. Set buying/selling prices and buying/selling amount. You can also click on the last prices on the order book to set the buying/selling price conveniently. Then click on “Buy”/“Sell”.
Step 4: After successfully placing an order, you will be able to view it in “Orders” at the bottom of the page.
Step 5: Click to view details of any order on the list. Before an order gets filled, the user can cancel it by clicking on “Cancel”.
Margin trading is a type of trading in which traders borrow from the market in order to buy or sell larger positions by pledging their own assets as margin. Profits and losses can be multiplied by Margin trading, and small price fluctuations magnified by leverage can have a significant impact on profits and losses. While the rewards are high, Margin trading also carries high risk, making it more suitable for experienced traders.
Leveraged trading can be used for a variety of trading strategies, including shorting, hedging, diversification, and arbitrage, in addition to amplifying returns. Many hedge funds and investment firms see low-leverage trading as a financial tool that not only improves capital utilization but also allows for controlled liquidation risk, avoids losses in volatile market conditions, and steadily improves long-term financial performance. However, because leveraged trading is essentially a borrowed transaction, you must pay interest on the borrowed money and weigh the cost and potential benefits before using it.
Gate.io supports leveraged trading in over 400 cryptocurrencies, allowing users to borrow the base currency to go short or the denominated currency to go long, and there are two types of trading depending on whether or not the margin for a leveraged position is shared: leveraged position-by-position and fully leveraged position. Because cryptocurrencies are highly volatile, and insufficient margins can result in liquidation, it is critical to understand the principles of leveraged trading and develop a good trading strategy before engaging in trading to avoid unnecessary losses.