This is where you make trades using money borrowed from someone else – or a brokerage.
While the potential rewards can be high, there are some sizeable risks that investors need to contend with too.
Let’s start with an example using dollars. Imagine you have $50. Margin trading is where you leverage $500 based on this sum of money in your pocket.
As you’d imagine, the principle in the cryptocurrency world is quite similar. Let’s say you want to buy Ethereum worth $1,000, but you’ve only got $500 available. Through margin trading, you’d be able to borrow an extra $500 – getting you up to the magic total.
If your $1,000 in Ethereum grew in value, to say $1,500, you’d be able to liquidate it and return the $500 to the lender, leaving you with a gross profit of $500.
Of course, the value of cryptocurrencies can go dramatically down as well as up. In a scenario where the price of Ethereum went down by 50 percent, your lender would be able to get their $500 first before you can access funds, potentially leaving you with nothing.