Margin trading is getting popular from both sides: Some people run lending bots to earn passive income, other people borrow to trade with more money than they have in their trading account. In fact, the USD swap stats on Bitfinex show USD loans are near the all time high at the time of writing this article (31M USD, May 2016). It’s partially loans for Bitcoin long positions, but partially also loans to trade LTCUSD and ETHUSD now with the ETH roll related to the DAO project.

Why would someone borrow money to trade? Believe it or not, borrowing is not evil. To name one good reason for all, leverage lowers your exposure. You don’t have to send all money you have to an exchange that can go bust tomorrow for all you know. With the current lending rates it won’t even cost you an arm and leg to hold a leveraged position for a month or two.

Ways to borrow money to trade

Where do you borrow the money?

  • Some exchanges with margin trading offer “swaps”. Other users, willing to lend out, provide the funding. You automatically get a loan below your specified maximum daily rate as you open a position in margin trading section of the exchange. Once it’s open you get to see your margin costs. By closing the position the borrowed money plus interest is automatically sent to the person who provided the funding without you knowing who that was.
  • Other exchanges don’t have margin swaps yet users can still margin trade. That is the case of Kraken. They have their own funds to lend out to users and don’t bother with the p2p lending system since it is more complicated to regulate.
  • Futures exchanges lend money free of charge (without interest). OKCoin in China has their own fund allegedly open to some chosen investors. From practical point of view it’s the money of the exchange. Cryptofacilities trade Bitcoin forward meaning the funding is from counterparty - the platform doesn’t invest in user margin.
  • Last but not least, people do borrow to trade on Localbitcoins or Bitstamp, none of which provides any form of margin trading. Traders need to borrow elsewhere and very often you will see trading loans on BTCJam. Rates are variable.

Available leverage

The most widely used leverage is ~3x. That is currently offered by Bitfinex. On Poloniex you get 2.5x.

However Bitcoin futures go higher

  • 10x and 20x leverage on OKCoin
  • 3x-50x on Cryptofacilities
  • up to 100x on BitMEX

While high leverage is certainly a way to earn money faster it is also an easy way to get rekt margin called and wipe out your whole account.

Some numbers

How much must the price move to get liquidated?

  • Leverage 3x

You are fairly safe with leverage of about 3%. On Bitfinex the maintenance margin is 15%, on Poloniex 20% but in both cases that is calculated from the total equity in your margin account. You can just transfer more BTC or altcoins from your exchange or lending accounts as long as you have some free money on there.

Bitfinex
========

Open short ETHBTC

-10 ETH @ 0.02155 (=0.2155 BTC)
of total equity 0.16 BTC

Req 15% of 0.2155 ~ 0.04 BTC

Liq Price ETH ~ 0.028 BTC

You see that with 3x leverage the price would need to double to get you liquidated.

Moreover: You can place a stop order to limit your losses

  • On Bitfinex you place your limit long or short and after that a stop in opposite direction limiting how much you want to risk to lose. Other than that, placing another limit in opposite direction will get you “stopped” in profit. On Bitfinex you cannot have two positions in the same market in different directions, meaning they will cancel each other out. In the image above you have a margin short on ETHBTC. Once the ETH price sinks to 0.02019 BTC the waiting long limit order will get filled from the active short one resulting in no open position and profit.
  • There is STOP-LIMIT order on Poloniex though the interface is a bit dodgy so good luck with that.

If you still get close to the maintenance margin your position will be completely liquidated (you are not getting noticed and all of your position closes at market price).

  • Leverage 10x

The 10x leverage is about the healthy limit for positions that you intend to hold longer without babysitting them at all times.

You can get 10x leverage on OKCoin futures. A price movement of about 10% will get you liquidated which in these days on BTCUSD market doesn’t really happen often.

  • Leverage 20x

With 20x leverage you are turning into a gambler. Movement of 5% will liquidate you and you should know that 5% is the usual size of a big pump/dump that occurs just about every other week. Such an event usually slays most of heavily leveraged trades so don’t forget to set your alarms with enough reserve - these things happen very fast.

If you are in the situation where the market moves against you like this and your liquidation level is getting close, here’s what you do on Okcoin:

  • Press the + button next to your margin numbers
  • Increase margin. That will transfer some more money from your futures account into that position, moving your liquidation level further. If the market returns back to your direction soon enough you will be able to withdraw that added margin back and carry on holding that position until (hopefully) green numbers.

  • Leverage 50x

Ultra-high leverage like this is a new feature on Cryptofacilities. Users now get standard account and TURBO account. Standard one offers 3x leverage, the TURBO up to 50x.

The advantage on Cryptofacilities is that if you are getting close to maintenance margin you still have 24 hours to top up your account with more Bitcoin and avoid getting liquidated.

If you fail to do so, your position still doesn’t necessarily get liquidated completely: The system only liquidates the minimum to restore your maintenance margin.

This way, if you are low on money or simply not at the screen but the price dips or spikes shortly before moving in your direction, you might still end the trade in profit.

By the look at the table below you see why a redditor called CF just another casino: A movement of 0.5% already triggers partial liquidation. On BTCUSD pair it is roughly a movement of 2.25 $ which is borderline noise. You cannot possibly predict that exactly enough which means the risk is absolutely outsized. I reckon 50x leverage and more is good for well tested algos and bots though.



The cost of getting rekt

The sad truth is that when you don’t close your losers in time or when the market moves to rapidly you get to lose a lot.

Let’s see some numbers on “OKCasino” OKCoin

Open 20x ~ 20 BTC
long @ 464$ on futures market
on OKCasino futures
-> 19.9 BTC worth of contracts
 = 92 contracts
 = 100/464 = 0.216 per cont

Liq level:
~439$ on futures market
 = ~5% movement against you
 = 100/439 = 0.228 per cont
-> you lose ~5*20 ~ 1 BTC

If you set to risk 0.2 BTC max
= stop at ~1% movement (~5$ from 464$)

  • Know how much you want to risk
  • Set either a stop or a price alarm. You get price alarm with free Android apps like TabTrader or BitcoinParanoid, although not for futures. For that it is better to use cryptowat.ch - the alarm is so scary it will wake you up, guaranteed. You can set it up simply by clicking the price axis (a yellow tick appears, see picture above).
  • Always have a way to get to your account in an instant if you have open positions!

People from the US

If you are American, you probably already know most exchanges won’t let you trade on high margin - futures exchanges have pretty much all that limitation.

OKCoin, BitMEX or Cryptofacilities - all of them are closed for people from the US. That is, in theory. In reality, OKCoin doesn’t need you to provide any documents to get verified meaning you can get away with VPN. Other platforms need full verification and you probably don’t want to fake that.

Another good point is that traders are (righly) afraid OkCoin might pick them out based on DNS leak or whatever, asking them to prove they are not American and seizing their funds if they fail to do so.

If you are American and want high margin you can still go to BTCC. They offer 25x leverage and don’t have restrictions against American people. It is a Chinese exchange so you will get good liquidity, BTCCNY is anyway the place where the volume is made now.

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