Cryptocurrency and all the other types of digital currency might have been a technological marvel and have heralded to the entire world a system of completely decentralized and secure currency. However, the billion-dollar question of whether or not they will be used as a mainstream mode of the transaction still remains in an area subject to much speculation.
One of the biggest reasons contributing to this magnitude of uncertainty is uncertainty itself… Or to be precise its volatility. While any currency is subject to fluctuations in value, cryptocurrencies suffer fluctuations at levels that are alien to any fiat fluctuation. Take the most famous cryptocurrency – the bitcoin – for example. There was a time when the bitcoin was valued at $0.01 in May 2010. The price steadily grew and suddenly skyrocketed to its peak value of $19,783 in December 2017, making one bitcoin enough to purchase a few cars. However, it started to plummet again in value, falling to $3300 in December 2018.
Any currency that is subject to these levels of fluctuation can never be used as a mainstream method of transaction. A person who gets crypto money in return for some product being sold will always live fear this fluctuating value.
There is, however, a silver lining behind every rain cloud. This fluctuation might seem like a major disadvantage for the mainstream financial world, but for currency traders, this fluctuation is what makes cryptocurrencies a lucrative instrument for trading.
Investor.com mentions that there are close to 3000 cryptocurrencies operational right now. Each cryptocurrency has its own value, and it keeps fluctuating. Just like forex trading, cryptocurrency trading is one of the most recognized methods of making a profit by expert traders who can predict the fluctuation.
How does trading work?
The way trading cryptocurrency works is quite similar to how any other trading platform at work – like a stock exchange or the foreign exchange. A trader buys a certain currency with hope or rather for the calculation that the prices will go up. Once the prices go up, the trader will sell the currency at the new high cost, and the difference between the price that they purchased for and the price that they sell is the profit that they have accrued!
This is the most common method of trading called long trading. In addition, there is also the concept of short trading. It involves quickly buying and selling a certain cryptocurrency at a higher cost and then forcefully buying the same currency at a lower cost when the prices fall. The process mentioned above is not as simple as it sounds, but its crux remains the same.
While longer trading has been the choice of both amateurs and professional traders alike, short trading has only been the forte of seasoned traders.
It is quite evident that the profit that you make is proportional to the volume of currency that you trade. Let us assume that the price of a bitcoin right now is $100. As a trader, you can buy one bitcoin right now, and you can sell that bitcoin to the exchange in the event of the price of a bitcoin rising to $102! The two dollars is your profit. It cannot be denied that the opposite of it could also happen – the price might fall to $90, and in that case, you stand to bear a loss of two dollars.
The exchange, in return for facilitating this trade, takes a small part of your profit as the commission. This is one of the biggest revenue streams for any exchange. The earnings of exchange are, much like the earning of the user, proportional to the trading volume.
The relevance of crypto margin leveraged training
Let us take a simple example. If you have a friend with just $100 who is experienced in trading, and you have quite some money, you can give that person about $9900 as a loan, and ask them to trade. Instead of just making a two dollar profit, the same friend has made a $200 profit. You can probably take a cut from the $200 and also get back your $9900, making it better trading for your friend and better profit for you.
There are exchanges that facilitate this kind of trading. The only difference is that instead of letting you borrow from a friend, the exchange itself facilitates the amount that is given to you as extra to improve your trading position size.
This is referred to as margin trading or leverage trading, and both these terms are often used interchangeably.
Crypto margin trading platforms expect traders to understand two key terminologies – margin and leverage. Let us talk with the examples stated above. The $100 initial investment that the trader had is referred to as the margin. The $9900 that was provided by the friend, or in this condition, the exchange, is referred to as the leverage.
The leverage is generally represented as a multiplier of the margin. There are exchanges that give 10 X or 100 X. Some exchanges even go ahead and take the risk of providing even 150 X.
Handling profit and loss
Crypto margin leverage trading is surely a great advantage for both the exchange and the traders. The exchanges get to net better profit, and the traders can now explore the market that we are never available for them with just the margin.
Everything goes well until the trading is profitable – both the exchange and the trader are happy. However, the bigger question is what happens in case of a loss.
It is for this purpose that an exchange mandates that a minimum balance should be held in the exchange account by the trader to access the leverage. If a loss is made and if the exchange is not able to recover its leverage, the exchange phrases or rather locks the trading account of the user and makes an attempt to retrieve its losses from the minimum balance mandated.
A trader can start trading again only after they have deposited the funds required to reach the minimum balance in the exchange.
Benefits and advantages of leverage trading
A crypto trading platform with leverage is a lucrative business idea, and it explores the territory of making a profit in the crypto space beyond the concept of mining. Although a crypto trading software might be an expensive investment, the returns are not only high but even guaranteed – just like in a casino how the house always wins; the exchange can make a profit irrespective of the trader making a profit or a loss.
There are quite a lot of benefits to trading with leverage.
The profit is extremely magnified! It is to be remembered that your investment is just the margin… Technically. What you’re putting into play here is your expertise in understanding the crypto market, and its patent is in volatility. Therefore, this magnified position helps in netting better profit.
Since the leverage frees up quite a lot of financial space for the investor, they can use it to diversify their investment portfolio, maybe even right within the exchange. The process of enabling an increase in the amount available for investments is called gearing.
Short trading is possible only with leverage enabled exchanges. Therefore, if your expertise suggests that the price of a particular cryptocurrency is all set to fall, you can still make a profit out of it! Making a profit out of a currency that would fall in price is surely not possible in a traditional exchange.
Leverage trading is not a bed of Roses… As much as there are possibilities for increased profit, there are possibilities for increased losses as well. It is to be noted that sometimes, the losses can exceed the initial investment of the trader, effectively washing out all the investments. It is a high-risk trading method, and traders have to make meticulous choices before they invest.
Even if there is a small drop in the price of the coin that you invested in, the magnified trading volume might result in proportionally magnified losses for you. Even small shifts in the market are likely to cause substantial losses for traders.
Disadvantages can be effectively eliminated, although not completely. Most crypto margin Leverage exchanges provide traders with features such as stop-limit orders that can help mitigate the risk of loss.
Irrespective of cryptocurrency becoming a mainstream mode of transaction, it is quite evident that they can surely be used to make a profit in cryptocurrency trading. Irrespective of a trader making a profit or loss is quite evident that the exchange can surely make a profit.
This makes cryptocurrency exchange trading one of the most lucrative business ideas in the crypto space. Putting together an impeccable UI, a matching engine, and wallets might seem quite like a cumbersome task for any company or business. However, with the availability of white label crypto margin trading platforms, it is always possible to not just kick start but even jumpstart your business in the crypto exchange space.
If you would like to create a business out of crypto exchanges, all you need to do is get in touch with a blockchain app development company that specializes in whitelabel crypto exchange. They will take care not only to create it but also to customize it for you according to your requirements so you can exchange that amazing investment for long-term profit!
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