An Introduction to Margin Trading:
In the stock market, margin trading refers to the process where investors purchase more stock than they are able to afford. In the Indian context, margin trading may also be known as intraday trading and this service is provided by various stock brokers. Margin trading comprises of buying and selling of securities in one single session. Over the course of time, the approach on-time duration has been relaxed by various brokerages. The process now demands that the investor must speculate the stock movement in a particular session. Margin trading is a quick way of making easy money. This used to be a specialized field, but now, with the advent of electronic stock exchanges, it is accessible even to small traders.
A better understanding of Margin Trading:
To get a better overview of Margin Trading, let’s start with an example using dollars. For instance, a customer has $50. Margin Trading is where the customer leverages $500 based on this sum of money in his pocket. Similarly what he imagined is similar to the principle in the cryptocurrency world. Let’s say another customer wants to buy Ethereum worth $1,000 but he’s only got $500 available. Through margin trading, he would be able to borrow an extra $500 – getting him up to the magic total. If his $1,000 in Ethereum grew in value, to say $1,500, he’d be able to liquidate it and return the $500 to the lender, leaving him with a gross profit of $500.Of course, the value of cryptocurrencies can go dramatically down as well as up. If it so happens that the price of Ethereum goes down by 50 percent, his lenders would be able to get their $500 first before he can access funds, potentially leaving him with nothing.
Common risk factors of Margin Trading:
The main risk to remember is that the trader has the potential to lose his whole initial investment through margin trading, especially if his focus has been on altcoins with a low volume and high volatility. If one of his trades starts to lose money, his margin can be “called in.” Let’s say the trader is margin trading with a ratio of 2:1, where every dollar he’s investing is matched by someone else. Here, the trader’s position would be liquidated when the value falls by about 50 percent in order to preserve the lender’s funds.
What is Bitfinex:
Bitfinex, the cryptocurrency exchange with multiple platform services as Margin Trading, Margin Lending and OTC (Over-The-Counter) that permits an off-exchange trading mechanism, is all set to expand its margin trading capacity to up to 100x leverage. The multi-national exchange originally registered in the British Virgin Islands but having its headquarters in Hong Kong, has in recent times been levied with fraud allegations ranging to the tune of a surmounted loss of $850 million custom funds. And in a bid to recuperate, the crypto platform has decided to boost user’s trust, by incorporating an increased marginal trading instrument although a marginal trading device that allows for up to 3.3x leverage is already offered by Bitfinex. Bitfinex has future plans to expand its margin trading features into its derivative trading.
Margin Trading on Bitfinex:
Bitfinex allows for users to trade with up to 3.3x leverage by receiving funding from the peer to peer margin funding platform. In order to borrow the desired amount of funding at the rate and duration of their choice users can enter an order, or they can simply open a position and funding at the best available rate at that time will be taken out by Bitfinex.
How does it work?
Bitfinex provides a great trading environment for the spot purchase and sale of Digital Tokens. It allows both unfinanced as well as financed transactions. The funds deposited by trading participants on the site fund the unfinanced purchases. For example, if a trader deposits $100.00 into her account on the site, she is allowed to purchase $100.00 worth of bitcoins in an unfinanced transaction. Purchases and sales of Bitcoins on Bitfinex, whether in an unfinanced or financed transaction, are settled by delivery of the full amount of the bitcoins or other Digital Tokens by the seller to the purchaser’s account against the payment made in full by the purchaser to the seller’s account.
Bitfinex permits financed transactions in Digital Tokens through its platform-enabled, peer-to-peer financing functionality. If they choose to do so, Financing Providers may offer to finance from and on their own account. Financing from Financing Providers may be accepted by Financing Recipients for up to 70% of the value of a Digital Token purchase. For example, on depositing $30.00 to the site, a trader may obtain financing in an amount not exceeding $70.00 in order to buy $100.00 worth of bitcoins in a financed transaction. Stated in other words, financing equal to a maximum total bit coins-to-equity ratio of 3 1/3 to 1 may be accepted by her.
A type of financed transaction allowed on the platform is Shorting. A “long sale” of Bitcoin, consists of the seller entering into a regular spot trade of Bitcoin and settling the transaction by delivering bitcoin that she owns outright. A “short sale” of Bitcoin also consists of the seller entering into a regular spot sale of Bitcoin but the transaction is settled by delivering bitcoin that she has borrowed. Digital Tokens can be borrowed for purposes of short sales through the platform’s peer-to-peer financing functionality. The bitcoin borrower may seek offers or make a bid to borrow Digital Tokens on the Financing Order Book. Bitcoin borrowers are not allowed to borrow more than 70% of the bitcoins sold in a short sale. The fiat proceeds from any short sale serve as collateral for the borrowing of the bitcoins until those bitcoins are repaid.
Bitfinex permits trading participants to utilize third party peer-to-peer financing from various other participants on the platform to trade Digital Tokens. Financing Recipients may obtain financing in one of two general ways: they can place bids for financing on the Financing Order Book; or, they may opt for being automatically matched through the Site’s order matching engine with one or more than one Financing Providers on the Financing Order Book at the best prevailing price on the Financing Order Book. Although it is not a party to these financing contracts, Bitfinex enforces the contracts established between Financing Providers and Financing Recipients on the Financing Order Book.
The Financing Order Book is independent of the Trading Order Book. Once a Financing Recipient secures the desired financing, both financed and unfinanced transactions on the Trading Order Book are indistinguishable from each other to the trade matching engine. The amount of the financing, the term of the financing, and the interest rate are the commercial terms that are negotiated through the Financing Order Book between Financing Providers and Financing Recipients. Obtaining financing does not create any compulsion to purchase Bitcoins on the Trading Order Book. Financing from B may also be replaced by A at any time with more favorable financing.
In the above example, the bitcoins purchased by A ($100.00) are subject to a Lien in favor of B up to the total amount of financing secured from B ($70.00 plus any interest component). A will be able to remove any amount of bitcoins from the Site that is not subject to the Lien. If the Financing Recipient’s equity falls to or below 15%—calculated as the quotient (expressed as a percentage) obtained by dividing (a) the excess of (i) the market value of the purchased bitcoins over (ii) the total principal amount (plus accrued and unpaid interest) relating to all financing outstanding by (b) the market value used in (a)(i), above— the liquidation of the bitcoins in A’s account will be forced by Bitfinex without notice to A, return financing to the Financing Provider, with accrued interest, and return the balance to the Financing Recipient. Bitfinex does not make margin calls.
As set out in the Terms of Service, the trader grants Bitfinex agency implement, levy, monitor, and maintain any and all Liens in favor of Financing Providers and to force-liquidate any cryptocurrency in his/her name or control on the Site if necessary to ensure that any Financing Provider on the Site from whom the trader has obtained financing is repaid in full. Trading markets in digital tokens can shift quickly. Price movements can be unexpected. There is no guarantee against losses on Bitfinex. The trader may lose more than what is in the trader’s various wallets on the Site if the trader engages in financing on the Site. The trader is responsible for any trading and non-trading activity on his/her Bitfinex account, but Bitfinex is required at all times to retain the ability to protect Financing Providers by force-liquidating their account, as and when necessary. No guarantee can be undertaken by Bitfinex to stop losses even with the ability to force-liquidate any of their positions (due to, for example, market volatility and liquidity). Bitfinex will not be and is not responsible for any Financing Provider losing funds or Digital Tokens to any Financing Recipient on Bitfinex.