What is Margin Trading?
Margin trading, which is also known as buying on margin, is simply the process of borrowing money from a lender to buy assets such cryptos, stock, bunds, or other marketable securities. When you buy any of these assets on margin, the asset itself is used as collateral for the loan. By trading on margin, investors can increase their buying power by up to 300%.
How does margin trading work?
Let assume you decide to buy $10,000 worth of an asset. You proceeded to pay $5,000 in cash and borrow, buy on margin, the other $5,000. If your investment grows by 25% to $12,500. With your cash outflow at only $5,000, your actual return on investment would be 50%.
The example above would seem quite easy to comprehend, but you must understand that margin trading increases losses just as it increases profit. For instance, if a $10,000 investment decreased by 25% to $7,500, 50% would have been lost on the trade.
It is worth mentioning that margin lending funds are not entirely free, and like other loans, margin loans are charged interest. Margin rates are generally lower than the annual percentage rates (APR) of personal loans and credit cards, though, and there is typically no set repayment timetable.
Since margin positions are often held for relatively short periods of time, interest charges are typically reasonable. However, the longer your margin loan remains unpaid, the more you’ll want to consider how interest costs could impact your returns.
How to earn with margin lending ?
It is very simple. As mentioned in the previous part, when a trader is doing margin trading, he is sometimes not borrowing to the platform but to other users instead that are doing the margin lending mechanism to earn money on their crypto holding. Borrowers and lenders agree on the interest rate, the minimum time lockup and the amount borrowed. As margin trading is very popular, it is possible to earn very good yearly interest as a lender, especially for stablecoins but also for altcoins.
Pros and Cons of Margin Lending
Safe and Easy to Do
Once you get the hang of margin trading, it can be pretty easy to execute orders and a safe way to make a passive income.
High interest possible with fewer risk
Margin trading opens the door for the possibility of high-interest with fewer risks, thus allowing everyone to make a passive side-income with crypto margin trading.
Funds are locked
When the trade is on, only the borrower can stop the operation, so unless the time of renewal has come, the funds will be locked
Market laws apply
It is a market, so if no borrower wants to take a loan with your choice of interest, you will not receive interest
Best place to do Margin Lending
Hope you’ve understood the concept of margin trading and how to leverage this as a passive income. The best places for margin trading are:
Written by: Narender Charan