Margin trading (or trading on margin) allows one to trade with borrowed assets. Effectively, those who use margin trading are granted the ability to amplify their Profit & Loss (PnL) depending on the leverage provided.
Margin trading is widely utilised on currencies, stocks, commodities, and has recently been introduced into digital currency trading. To trade with more funds than are present on the account balance, one has to borrow. In the traditional financial markets, the lenders of these funds are often brokers. However, in the digital assets space, suppliers of assets are typically either other traders or a venue that provides the margin trading opportunities. At Bequant Global, the supplier of digital assets to trade with on margin is the venue.
Trading on margin requires a certain part of the available account balance to be pledged as collateral for every position: in other words, the amount pledged as a percent of the margin account balance defines the leverage. Assuming that 12:1 (also referred to as x12 or 12x) leverage is available, a trader would need only $1,000 to open a $12,000 position. The maximum leverage available is defined by the venue or broker and may range from 2:1 all the way up to x1000 and beyond (such leverage is hardly ever available in the digital assets markets due to their relatively high volatility; however it has been offered from time to time by certain brokers).
The maximum available leverage at Bequant Global is currently x12.
A long position with x12 leverage on the BTC/USDT pair translates into an expectation that the BTC price in terms of USDT will go up in the future. For each 1% increase in the BTC price, the value of the position will increase by 12%. On the other hand, if the price of BTC falls to such a level that funds on the account can no longer cover the minimum required funds to keep the position open, the position is then liquidated. More about the liquidation mechanism is described in this article.
Let’s assume that the price of BTC is USDT 20,000 and a trader believes that it will continue to rise. The trader has USDT 2,000; however, he or she wants to boost the potential positive PnL. The trader uses the USDT 2,000 to open a $24,000 (x12 leverage) long position. Let’s further assume that a day later, the price of BTC goes up by 5% to 21,000 (20,000 * 1.05). The trader decides to close the position and realize a positive PnL of nearly USDT 1,200 (24,000 * 5%). In reality, it will be slightly less due to the Interest Rate paid – to learn more about Interest Rates and Borrowing Limits see the Fees and Limits page.
If the trader did not use the leverage but instead traded on the spot market, the value of the position would have been only USDT 2,000 and the 5% gain would result in only USDT 100 ($2,000 * 5%) positive PnL, as the value of the position would have been simply the trader’s balance of USDT 2,000.