May 21, 2020

Crypto Margin Exchanges

Ever since the bear market of 2018, people got caught holding altcoins anticipating a reversal in the market. Despite the occasional pump in select altcoins, market participants began shifting their money to margin exchanges, where they could leverage their bitcoin at up to 100x leverage, allowing them to make money both on the short side and long side of bitcoin movements.

BTC underlying exchanges:

USDT Underlying exchanges:

(There exists smaller exchanges, but it isn’t wise to trade on them, as they aren’t trusted in the space.)

Depending on your location geographically, you will determine your favorite exchange, although the industry leaders at this time remain Bitmex and Binance. Bitmex allows BTC, ETH and certain altcoin futures trading, where Binance allows BTC and many altcoin pairing perpetual swaps against USDT. FTX allows this as well, and are a major up and comer in the space consistently adding new products to their offerings.

The most common traded product is BTC perpetual swaps, which are a 24/7 derivative product that does not expire, and is the most liquid.

Unlike traditional market margin, where retail is allowed 2-3x max (aside from fx), crypto allows you to trade up to 100x leverage without KYC. Because of no KYC, the exchanges decided to implement a feature similar to a margin call, referred to as liquidation.

There are two types of leverage. Isolated, and cross. Isolated, in layman's terms, let’s you use leverage by borrowing up to a certain amount from the exchange, which if the position on a BTC trade would go against you, there is a price where your position would be liquidated so that you wouldn’t incur bankruptcy.  The more isolated leverage you use, the more you are borrowing from the exchange, and as such your liquidation price gets closer to your entry.

On cross leverage, you are by default using 100x (125x on Binance). However, you are using the BTC or USDT in your account balance as collateral. Should you get liquidated on a position using cross, your entire account will be liquidated. Risk management is key, and each exchange provides you with a calculator to determine your risk.

Some people think that leverage matters in terms or profit/loss. However that is a common misconception if your risk is managed. Meaning, if you were to long 10,000 BTC contracts at 1x, or 100x on Bitmex, the profit/loss would be the same, it would just be a matter if you borrowed a lot from the exchange (higher leverage), or used more of your own collateral to enter the position (lower leverage).

Although leverage exchanges could increase your profits tremendously, risk MUST be a key tool you incorporate in your trading skills. At the end of the day, you must determine if you are using the exchange knowledgeably, or are you simply gambling. In the DOJO, we ensure that risk management, planned setups, and proper execution are a mainstay in your margin exchange journey. All our admins have over 3+ years on these exchanges, and as such are able to answer any questions in setting up an account and navigating it properly.