Unique Features of a Cryptocurrency Exchange
Margin trading
Margin trading is an asset trade procedure that utilizes a third-party’s funds. When contrasted with conventional trading methods, margin accounts enable traders access to larger amounts of capital, enabling them to leverage their positions.
Basically, margin trading amplifies trade results so traders can reap greater profits. This expansion of trade results is a reason behind margin trading’s popularity, particularly in markets that feature low volatility. For example, the international Forex market.
Margin trading is also utilized in stock, crypto, and commodities markets.
Within conventional markets, the investment brokers serve as the lender of funds. Other traders also function as a source of funding, earning interest on the basis of market demand for margin trading. Even though it is uncommon, crypto exchanges also impart margin funds to their users.
How does margin trading function
Upon initiation, the trader will be required to commit a percentage of the total order value. This preliminary investment is referred to as the margin, as it has a strong connection to the concept of leverage.
With regards to Forex brokerages, margin trades are consistently leveraged at a 50:1 ratio, but 100:1 and 200:1 are also utilized in certain cases. With crypto markets, the ratios usually range from 2:1 to 100:1, with the trade community frequently using the ‘x’ terminology (2x, 5x, 10x, 50x, and so on).
Margin trading can be used to initiate both short and long positions. A long position is reflective of an assumption that the asset’s price will appreciate, while a short position indicates the opposite.
When the margin position is open, the trader’s assets serve as collateral for the borrowed funds. It is critical for traders to comprehend this, as a large number of brokerages reserve the right to force the sale of these assets in the scenario the market moves against their position (above or below a specific level).
For example, if a trader initiates a long leverage position, they could be margin-called when the price reduces significantly. A margin call occurs when a trader is required to deposit additional funds into their margin account to satisfy minimal margin trading requirements.
If a trader does not comply, their holdings are instantly liquidated to make up for their losses. Usually, this happens when the complete value of the equities contained in a margin account, referred to as the liquidation margin, falls below the total margin requirements of that specific exchange or broker.
Benefits and drawbacks
The overt benefit of margin trading is that it can result in increased profits owing to the increased relative value of the trading positions. Additionally, margin trading can be useful for diversifying, as traders can initiate several positions with comparatively minimal amounts of investment capital.
Regarding its upsides, margin trading does have a clear disadvantage of increased losses in much the same way that it can increase profits. A point of divergence with regular spot trading is that margin trade introduces the possibility of potential losses that could exceed a trader’s preliminary investment and is viewed as a high-risk trade method.
Dependent on the amount of leverage in a trade, even minimal reductions in market prices may cause considerable losses for traders. Due to this, it is critical that investors who decide to utilize margin trading use rigorous risk management strategies and utilize risk mitigation tools such as stop-limit orders.
Margin trading in crypto markets
Margin trade, by its nature, is riskier than conventional trade, but within the domain of crypto, the risk is amplified. Due to the volatile nature of the market, crypto margin traders should be particularly careful.
While hedging and risk management strategies may prove to be handy, margin trade is not recommended for beginners. The ability to analyze charts, identify trends, and determine entry/exit points will not minimize the risks inherent to margin trade, but it may assist in anticipating risks and trading more efficiently.
So, prior to leveraging their crypto trades, it comes as a recommendation that users should first inculcate a comprehensive understanding of technical analysis and obtain extensive spot trading experience.
Margin funding
With regards to investors who do not possess the risk tolerance to take part in margin trading themselves, there is another method to obtain profits from leveraged trade methods. Specific trade platforms and crypto exchanges provide a feature referred to as margin funding, where users can make a financial commitment to fund the margin trade of other users.
Typically, the process follows particular terms and provides dynamic interest rates. If a trader is ok with the terms and takes up the offer, the fund’s provider has an entitlement to the repayment of the loan with the interest that has been decided upon.
These mechanisms may vary between exchanges, and the risks of providing margin funds are comparatively low, due to the fact that leveraged positions can be liquidated by force to avert increased loss.
Margin funding needs users to retain the funds in their exchange wallet. So it is critical to evaluate the inherent risks and comprehend how the feature functions on their preferred exchange.
Cryptocurrency derivatives
The crypto market has developed into a sprawling ecosystem of more than 2,000 coins and tokens, with each of them focusing on a particular type of application and use case that is made with the disruptive blockchain technology. Although the infrastructure supporting the crypto-sphere is still in its preliminary stages, there are several developments that would warrant increased exposure and awareness of crypto.
Crypto derivatives are an example of such progress, which is a fresh line of financial products. The typical form of crypto derivatives at the moment is Bitcoin futures, which obtained a mixed reaction from the community.
The popularity of Bitcoin futures is visible when we observe daily trading volumes, which has witnessed an increase of more than 40% during the third quarter of 2017. In money terms, the aggregate everyday volume of Bitcoin futures stood at 5,053 contracts. It had a total value of approximately 177 million US$.
This information is pretty staggering, particularly if we consider that the crypto market has been in a recession since the beginning of 2018, where the prices of coins and tokens have dropped by over 85%.
Increased trading volumes are indicators of good liquidity, which is a good thing for market participants. This is reflective of an effective marketplace.
Crypto derivatives 101
A derivative is merely a financial contract between a couple or more parties that derives its value from an underlying asset, in this scenario, crypto. Particularly, it is an agreement to purchase or sell a particular asset, be it stocks or cryptocurrencies at a predetermined price and at a particular time in the future.
Derivatives do not have any direct value by themselves. The worth of a derivative contract is wholly based on the expected future price fluctuations of the underlying crypto.
The three common kinds of derivatives products are swaps, options, and futures.
Swap: A swap is an arrangement between two parties to exchange a series of cash flows in the future, typically based on interest-bearing instruments like bonds, loans, or notes as the underlying asset.
Swaps are typically interest swaps, which consists of the exchange of a future stream of fixed-interest rate payments for a stream of floating-rate payments between 2 different counterparties.
Futures: This is a financial contract where a buyer has an obligation to purchase or sell an asset (like commodities) at a static price and a predetermined future price.
Options: This is a financial contract where a buyer has the authority (and is not obligated) to purchase an asset or a seller to sell an asset at a predetermined price by a particular timeline.
Owing to the nascent nature of the crypto derivatives market, there are not a lot of derivatives products available at the moment. The typical crypto derivatives are Bitcoin futures and options, due to the fact that Bitcoin controls more than half of the entire crypto market capitalization, which makes it the biggest coin, with the highest levels of trade.
Reasons behind the trade of derivatives
- Security from volatility
- Hedging (Insurance policy)
- Speculation
Why copy trading for crypto?
Copy trading is often mixed up with social trading, but they are very different from each other.
In social trading, traders collaborate with regards to their trade strategies and price predictions. From this point, other traders – mainly those who lack adequate experience in trading choose those strategies and go by them.
Copy-trading introduces the concept of automation to this process. Usually, on a copy trade platform, users can reach out to expert traders, their trade histories, and strategies.
After identifying the authenticity of the trader, a user can link a part of their funds to that trader’s account.
Positions that the trader assumes from thereon are duplicated to the copying trader’s account, too. The amount that is invested in the copied trade is dependent on a couple of factors: the amount at stake by the copying trader, and the permitted percentage of that amount that can be invested in a single trade, as indicated in the platform’s policy.
These platforms are in wide usage in recent times within stocks and forex markets. Popular platforms include Zulu Trade, eToro, and Darwinex.
Advantages of a copy trade platform
- Decreased risks for new traders
- Reduced hassle, increased profits, simple learning
- Widespread adoption of crypto
- Advantages for experts
Conclusion
Time crunches, lack of skills, and experience have contributed to the increase in popularity of copy trade platforms. Taking into account the increase of interest of people in crypto assets, and the complexity of the market an accessible copy trade platform can work wonders. Blockchain App Factory’s cryptocurrency exchange development services are backed by BAF’s extensive experience within the crypto sphere and blockchain development.
