One of the clearest trends with encrypting over the past I don't know here or so is the appearance and increasing popularity of margin trading and different margin trading sites and I'm sure you've heard of many of them and many of the different exchanges in crypto now are also adopting this trend. And letting their users trade on modern or using leverage as it's maybe more known and I thought it would take this article to go through what margin is how it works actually under the hood and really to clarify for all of you out there so that you don't use these sides under you don't make mistakes with these sites. Because the consequences can be quite dire when you're using leverage trading so I thought I would go through what margin is and how it works so that all of you, can use these sites as a complement to your regular cryptocurrency trading or investing.
You want to get started with maybe shorting Bitcoin because you feel like hey we're gonna go down so I want a short break on or you want to go along if you deposit more than 0.2 bitcoins so make sure to go there and claim that bonus only using my link below let's get into what margin actually is and when you're trading on margin. you are combining the funds that you have on an exchange and borrowing additional funds from the broker or the exchange that you are on to trade and buy assets with borrowed money and that means that you can get leverage in your actual trade or investment so let's take an example right you want to buy Bitcoin let's say and you have on your account a thousand dollars to buy a Bitcoin with but you want to get even more exposure to Bitcoin than your thousand dollars well then if you are on a margin trading platform you could borrow. let's say you borrow $9,000 so that you now in total you have four thousand dollars plus an additional nine thousand dollars that you borrow from the exchange or broker and in total then you have $10,000 to buy Bitcoin with and that sounds great of course because now you get a much larger exposure to the underlying asset that you are going to purchase. And with that ratio, you have a 10x leverage that means that whatever your own capital is, in this case, $1000 the actual exposure that you have into Bitcoin would be 10x of your initial investment into that trade so you would buy Bitcoin for,$10,000 but your own capital is only one thousand dollars and that might not sound too complex that makes sense right the hard thing to understand.
They eventually will close your position and sell those assets for them to get their borrowed money back so let's take an example to understand the downside risks better let's say you take on a huge leveraged trade of 10x so you have your thousand dollars and you have borrowed nine thousand dollars from your broker from the exchange that you're trading on and you're buying Bitcoin at the prize of $10,000 per Bitcoin. so you're using these ten thousand dollars you bought one Bitcoin at ten thousand dollars now let's say you're in bad luck the price goes against you it goes down and it is starting to approach nine thousand dollars per Bitcoin now this is a simplified example but at that point, the only assets that you have in your account are the actual Bitcoin that you bought you used all of your money in your account to buy Bitcoin and now the Bitcoin price is approaching nine thousand dollars and remember you have a loan that you took out from the broker of nine thousand dollars if the broker wants to get paid back which they do.
A margin investment or investment with actual leverage because you pay twenty thousand dollars yourself and then you borrow the rest of the eighty thousand dollars so that is an investment with a 5x leverage and that is why if you're actually buying a house and you witness the prices in the housing market going up that return for you can actually be very very good. Because you are doing a leveraged investment and that also shows up when people lose their homes right when they lose their home because they can't make the payments they will get liquidated and many people, of course, got to know this in the housing crisis. Unfortunately and then the bank has the house as collateral instead of in a no broker account they have your account and the funds that you have in your account as collateral so it's very similar in many ways only. That of course, house payment is a way more secure purchase than Bitcoin it's less volatile so the collateral is more stable and long term collateral.
While a Bitcoin trade would be a short term trade where you have very volatile collateral and that means that you probably should be very careful with your actual margin or leverage that you're using.
I hope that you get this article very helpful for you.