Not everyone has the privilege to have the knowledge about trading from the start. Trading is not just an art but also an experience. An experience to go through ups and downs. In order to learn how to make profit in the bear market, we need to first understand the basics of what is margin trading.
What is Margin Trading?
In simple english, margin trading is a form of trading where you take a loan from a lender (person who gives loan) by keeping a collateral and invest the amount (along with your own collateral) in the market. Once you make a profit, you simply take out your profit and return the amount to the lender from whom you borrowed along with the interest.
However, if you fail to make profit, after a certain point (when your loss hits a certain point), your collateral is then permanently liquidated (Sold) to the lender. Scary, isn’t it?
However, if you know the trading strategies, then it shouldn’t be a problem for you to predict the market movement in the right direction.
Elements in Margin Trading?
Unlike the spot market where it is the simple buying and selling of crypto, margin trading has few more elements up in its sleeves. Since margin trading involves borrowing from the lender, things can get a little bit complicated. Let us understand each element of margin trading which will in turn help us make profit.
Leverage: Leverage is the amount of money that you would like to borrow from the lender to increase your investment capital and make more profit. Leverage is usually shown in multiple forms like 1X, 2X, 3X, 4X and can go up to 10X depending on various exchanges. On Cofinex, you can take a leverage of 10X on the BTC/USDT trading pair. 2X means that you can take twice as much loan as your collateral. For example, suppose you have 100 USDT tokens. If you apply for 2X leverage, you can take a loan of 200 USDT tokens from the lender and make your overall capital from $100 to $300.
Interest: Just like how banks give you loan on interest, even the lender gives you loan on your collateral in interest. However, the interest on margin trading is charged on per hour basis so as to give the trader the maximum efficiency on his profit making ability. Interest rate on a per hour basis can vary according to the type of crypto you are borrowing. In case of borrowing USDT on Cofinex Margin trading, you are charged an hourly interest rate of 0.00408%. This makes the daily interest rate on USDT around 0.098%
Liquidation Price: It is the price point on your trade at which your collateral will be diluted and sold at the market price to repay the principle amount + interest to the original lender. Liquidation price on your trade is set at a price point at which the value of your collateral is just as much as the loan that you need to repay.
Cross/Isolated: This is one such terminology in margin trading that has confused many people. Margin trading requires you to have some collateral so as to borrow money from the lender. However, you need to keep those collateral in either cross or isolated form. If your collateral is kept at cross form, then that collateral can be used to take loan for other crypto as well but will lower your worsen liquidation price. However, for every trading pair, we can have an isolated collateral form where collateral kept at that isolated form can only be used for that particular trading pair and hence, it won’t be used to take loan for any other purpose.
Long: Long in the world of margin trading means purchasing an asset with the expectation of it going at a higher price and then booking a profit.
Short: Short in the world of margin trading means selling an asset with the intent of buying it back when it’s price is lower and then making a profit. In order to understand short, it is important for us to consider an example and then derive the true meaning out of it.
How to make profit in the bear market?
This is perhaps the most curious question you must be having in your mind. Yes, it is possible to make profits when the market is moving in the downward direction. Like previously discussed, we can make profit by taking the right decision on when to SHORT any asset. We have already discussed what exactly is SHORT in the world of margin trading but in order to truly understand it, let us consider an example.
Suppose you have $100 and the price of one mango in the market is $10.
Now, when the price of mango goes down from $10 to $5, you can make a profit. You might wonder how. Read the steps further.
- You need to first borrow 20 mangoes from a lender who lends mangoes in the market using your $100 as collateral. That’s a 2X Leverage. At Cofinex, there are plenty of mangoes (cryptos) that are available to borrow.
- You definitely need to pay an interest rate on these 20 borrowed mangoes (cryptos) at Cofinex. Say, the mango lenders expect you to give him 1 mango extra on the time of repayment. NOTE – Repayment is done only in the form of an asset you borrowed. In this case, it is MANGO.
- The market value of those 20 borrowed mangoes is $200. But when it comes to repayment, the lender wants just 20 mangoes and not the value of those 20 mangoes (which is $200).
- You need to then sell the 20 borrowed mangoes at the market rate of $10/mango. Hence, you now have $200 + $100 (which is your collateral). This makes your overall purchasing power of $300.
- This whole process is called SHORT: Selling the borrowed crypto at the market rate.
- And then, when the price of each mango falls from $10 to $5, you use the $300 purchasing power to buy 60 mangoes ($300/$5). In this way, you now own 60 mangoes.
- That being said, you need to repay 20 mangoes + 1 mango extra (as interest) to the mango lender.
- Simply click on the Repay button and repay 21 mangoes (20+1) to the mango lender out of your total 60 mangoes. Now you are left with 39 mangoes.
- You can then sell these 39 mangoes in the market at a rate of $5 per mango and get $195.
- So now you have made $95 profit with the investment of just $100 in a market where price goes down by 50%.
Conclusion
The example in the previous case was just a simple analogy of mangoes being Bitcoin or for that matter any other crypto currency. At Cofinex, any trading pair listed in the margin trading market has enough crypto lenders who can lend their mangoes (cryptos) to you at nominal interest rates.
And with this margin trading feature, you can make profit in the bear market even when the market is going down. If you liked this article, share in on your social media and let the whole world know about it.
