The beauty of margin trading is the ability for you to enter into positions larger than your account balance. With a little bit of cash, you can open a much bigger trade in the crypto market.
Margin trading enables you to profit in both bull and bear markets, amplifies your profits up to 100x, and hedges against the risk of Bitcoin’s price going down.
To help you better understand the concept, here are the definitions of trading terms you need to know-
1. Crypto contract
Crypto contract is a cryptocurrency derivative. Bex500 offers 4 types of contracts including “Perpetual Contract”, “Double Contract”, “Forex” and “Commodity”.
The trading of these contracts is called “margin trading”.
When you buy 1 perpetual contract of BTC/USDT, it is like you are buying 1 bitcoin. When btc goes up, you can earn.
Also, when you sell 1 perpetual contract of BTC/USDT, it is like you are selling 1 bitcoin. When btc goes down, close the position, and you can earn.
2. Margin trading
When trading crypto contracts, you do not need to pay the full portion, but only a small amount of capital.
For example, if you want to trade a “Bitcoin perpetual contract” (contract pair: BTC/USDT), say the current price is $8,000, instead of paying $8,000, you only need to pay a portion, like $80, you can buy “1 bitcoin” worth of bitcoin contract.
If bitcoin goes up to $9,000, you will get the profit of $1,000
3. Open a position; buy/long & short/sell
a)“open a position”: the action to start trading crypto contract, for example, you can open a position with buying a “BTC/USDT”
b)“close a position”: the transaction that is the opposite of an open position. If you open with buying, then close the position means selling
c)Buy/long: you can open a position with “buy/long”, it means, you purchased the bitcoin (or other currency) with the expectation that it will go up.
d)Short/sell: you can also open a position with “short/sell”, which means, you want to sell the bitcoin first and buy back later because you think it will go down.
4. “Margin” and “Contract value”
a)Margin: When trading crypto contracts, you will be asked to pay a small amount of capital, the capital is called “margin”.
It is the money required to open a position.
b)Contract Value: the value of the position you opened.
For example, you buy a BTC/USDT perpetual contract, the contract value is 1btc. It means you are holding a position worth of 1btc.
The leverage describes the ratio of margin to contract value. For example, 100x leverage means, to open a position worth of 1btc, you will need 1/100 of 1btc as margin. If the leverage is 50x, the margin is 1/50 of 1btc.
This is the story that includes all the items mentioned above.
John wants to profit in the bitcoin market, instead of preserving bitcoin and waiting for it to rise, John decides to trade bitcoin using margin trading, because he expects the bitcoin to go down.
He opens a Bex500 account, deposits 1btc in total, and starts margin trading for profit!
1.He expects the bitcoin will go down, so he decides to short/sell the bitcoin perpetual contract (BTC/USDT).
2.He decides to short 1btc worth of BTC/USDT, in other words, he wants to short 1 bitcoin, and get profits when the bitcoin goes down.
3.The contract value=1btc (current btc price: 7470.92)
4.Since BTC/USDT contract offers 100x leverage, the margin he needs to pay is only 1/100 of the contract value, which is 74.71 USDT
5.He expects bitcoin to go down, therefore, he will open a position with clicking “sell/short”
Later on, he will close the position when bitcoin actually decreases in price.