The amount of profit that stockbrokers make is proportional to the trading volume facilitated by the stockbrokers. They find out multiple ways to increase the trading volume of their trader clients. One such way that they have discovered is margin trading or leverage trading.
What is leverage trading?
In simple terms, leverage trading is a trait that is executed by using borrowed shares from your broker to increase the size of your portion in a play so that you can make more money on the other side.
There are different types of leveraged trades like options, futures contracts, and buying on margin. Among all of this, buying on margin is considered to be the most profitable, and proportionally, the riskiest.
What is buying on margin?
While buying on margin might seem so sophisticated, we have always had an alternate terminology that we have taken for granted – loans! Yes, what we essentially do while taking a loan is that you take a considerable chunk of cash from an institution that profits from lending money to you.
If you were to buy a car for $50,000, you end up putting down payment of $5000 and borrow $45,000 over a time period of, let's say five years. Every month, you pay an installment for the borrowed money, which includes both the principal and the interest.
This is exactly how margin buying works – just like how the loan amount is disbursed based on a few parameters like your payment capacity and the terms of the institution offering the loan. Margin trading also has certain factors like the multiplier and the amount that you will need to essentially have in your trading account.
Although the process might be similar, it cannot be considered completely congruent because buying a car or a physical asset is not the same as borrowing for trading. The likelihood of you losing the car or the car being rendered useless is quite less compared to the possibilities of you losing money in trading.
How does leverage trading work?
Leverage trading is all about borrowing shares or cash to buy shares, or in this context, crypto assets for trading from the exchange itself. Leverage is always expressed as a ratio – some crypto exchanges offer leverage of 2:1, and some even offer leverages as high as 100:1.
Let us take the example of a 100:1 leverage. The 100:1 leverage simply means that you can borrow 100 times the amount you have set aside as the margin. Therefore, if you have $1000, you can participate in trades that require you to have $100,000.
For the sake of convenience, let us take the price of the Bitcoin to be $1000. If you have just $1000, you can buy just one bitcoin. If the price of the bitcoin rises by let's say, $10, you can sell them and get a profit of $10 for that $1000 you have.
However, if you were to borrow $99,000 from the exchange as leverage, you can trade for $100,000 instead of just confining yourself to the $1000. This means that you will not make just a $10 profit but a $1000 profit. Therefore, it is quite evident that leverage trading is a great way to increase your prospects for better profits.
Once you have made your profit, you will have to return the $99,000 that you borrowed to the exchange itself. In addition, there is also an interest that is levied on the borrowed amount. This creates a win-win situation – you get better profit, and through that profit, the exchange also gets to earn interest.
On the other hand, if the bitcoin prices fall by, let's say, $10, you would suffer losses of $1000 if you were to use leverage trading. In addition to returning the $99,000 that you borrowed, you will also need to pay the interest, which effectively results in a considerable loss leaving you with less money than the $1000 that you had in the first place.
To ensure that the exchange does not suffer losses, they impose certain conditions. They require margin traders to maintain a minimum balance in their trading account. Commercial losses can be recovered from that account. It serves more like collateral in the traditional context. Once the losses go overboard, the loss for the exchange will be recovered from the amount or the minimum balance set aside called the margin amount. This ensures that the exchange does not suffer any losses.
The stress on the fact that the exchange does not suffer any losses is quite inviting a statement to make whitelabel leverage crypto exchange a lucrative business. It is quite easy to kickstart your business provided you meet the regulatory requirements, and establish your compliance. All you need to do is either create your crypto exchange platform with leverage from scratch or purchase white-label cryptocurrency exchange software with leverage.
There are a lot of companies that provide these services such as this website, and all you need to do is get in touch with them and let them know about your requirements. They will take care to customize the exchange according to your requirements and have it launched for you, so you can start making your profit irrespective of the traders making profit or loss.
Featured image from BitcoinExchangeGuide.com