How to Trade Cryptocurrency?

In this topic we are going to discuss how we can trade cryptocurrencies with leverage and which platform should be used in order to do so. Before we start dive into to the details, you should consider that Margin trading (Trading with leverage) is not suitable for everyone. Trading with leverage can both give you an opportunity to earn a substantial amount of profit, but also at the same time can cause you to lose your entire asset if you do not practice proper risk management.

It is important to note that margin or leveraged trading is considered risky and speculative, so you should trade with caution.

When it comes to cryptocurrencies, choosing a right platform is crucial. Unlike forex market where there are many options to find a reputable broker with a good platform to trade currencies with leverage. In the cryptocurrency market options are far limited. Thus, finding a right platform to rapidly get you in and out of the market with no disruption is crucial.

Among the few cryptocurrency exchanges that offer margin trading, BitMEX is the largest and the most utilised margin trading platform for crypto assets currently operating, with a daily trading volume of over 380,000 BTC. BitMEX is a peer-to-peer trading platform that offers leveraged contracts that are bought and sold in Bitcoin. The BitMEX platform allows up to 100x leverage on a single trade, which gives the traders the opportunity to leverage their position without the need to hold the required bitcoin or crypto assets. The main advantage of this, is that traders do not need to hold a significant amount of crypto assets on Bitmex in order to trade large positions.

How dose trading with Leverage Works?

Let's start with the definition of leverage first. Leverage involves borrowing a certain amount of money to invest in something. In other words, leverage gives the power to the trader to control a huge amount of money with a small deposit.

For instance, if you deposit one Bitcoin and use 1:100 as a leverage to open a buy order on BitMEX, you request to borrow 99 extra bitcoins to trade, thus your order value will be equal to 100 (1 x 100) bitcoins. In other words, to buy 100 Bitcoin worth of contracts, you will only require 1 Bitcoin of Initial Margin.

That means now you own 100 bitcoins, so if the price goes up by 100 dollars you will profit 10,000 US dollar (100 x 100). On the other hand if the price of Bitcoin goes against your favour by only $80 dollar, you will be losing your entire one Bitcoin investment (80 x 100=8000 assuming if the price of Bitcoin is $8000) and your position will be liquidated.

Now let’s take a look at the BitMEX platform.

The left side panel is where you enter your order and set your leverage. In the centre, you will see the chart, buy and sell volume, orderbook, and recent trades. On the bottom, is where your open positions appear. On the top of the platform you can choose the crypto asset that you wish to trade.

BitMEX offers different financial products like margin trading for Bitcoin, Ripple, Ethereum, and few other cryptocurrencies. The platform also offers cryptocurrency derivatives and other financial products.

How to get started?

Step 1) Register An Account

In order to start trading with Bitmex, first you need to sign up for an account. BitMEX does not require KYC verification, and your account can be set up right away after providing some basic details, such as your Email address, name and country of residence.

Step 2) Deposit Your Account

Then you need to deposit some amount of bitcoin to your account in order to be able to trade and use the leverage. Please note, that BitMEX only accepts deposit and withdrawal of Bitcoin and NOT any other crypto assets

Step 3) Choose the Crypto Asset You Wish To Trade

Now in order to start trading and use the leverage first you need to choose a crypto asset that you wish to trade. Click the “Trade” link at the top of the screen. You’ll be taken to the trading screen where you can click the tab of the crypto you want to buy or sell. You can either choose to margin trade Bitcoin or any other cryptocurrencies offered.

Step 4) Set Up Your Trade And Enter The Market

Before we start talking about how to set up a trade and set the leverage lets understand these few terms displayed in the order panel:

Quantity: It is the total value of your position in US dollar including the amount you wish to borrow as leverage. For instance, if we assume the price of bitcoin is $8000 and you plan to use 100 as the leverage for this trade then you have to input ($8000 x 100 = $800,000) as your order value. Simply that means you are required to only put up 1 bitcoin by urself as initial margin and borrow the rest to run this trade. Thus, the higher the leverage, the less you have to put to fund your trade, but the greater the probability of losing it. The formula for calculating the quantity or the total value of your order is simple. Simply multiply the price of the crypto asset that you are going to trade by the leverage you wish to use. In this example we are considering to trade Bitcoin.

Formula)

Quantity: Bitcoin Price x Leverage

Quantity: $8000 x 100 = $800,000

Cost: The total amount of crypto asset that you have to provide to run your trade. Let's say you have a balance of 0.2 Bitcoin, and you want to buy 2 bitcoins because you believe the price will rise from here. Thus, in order to be able to trade with 2 bitcoins, you need to use a leverage of 10 (0.2 x10 = 2). In this case once you set your leverage at 10, the platform will lock the 0.2 available balance that you have to fund this trade with the 1:10 leverage. Therefore, the 0.2 is the cost of this trade that you have to provide.

Below is the formula on how to calculate the cost and initial margin (the initial amount the trader has to provide by himself to run the trade).

Formula)

Initial Margin: 1/Leverage x Quantity (Order Value)

Initial Margin: 1/10 x ($8000 x 2) = $1600 (0.2 Bitcoin)

Cost: Initial Margin + Fee

Cost: (1/Leverage x Quantity) + Fee

(1/10 x $16,000) + Fee = 1600+ Fee

Order Value: Order value is the same as quantity but it is shown in Bitcoin. For the example above it would be equal to 2 Bitcoins.

Available Balance: balance you have in Bitcoin.

Once you enter the quantity (total value of your order) and set you leverage, then you can decide to enter the market immediately or at a pre-determined price.

A market order is a type of order that you want to enter the market at the current price or the best available price. The market order allows you to enter the market immediately at the best available price. Thus, once you click either "Buy Market" or "Sell Market", your order will be executed immediately.

On the other hand, limit orders allow you to set a pre-determined price to buy or sell.

A limit order is an entry order placed to either buy below the market price or sell above the market price. A sell limit is filled at a specified price or higher and a buy limit is filled at specified price or lower.

In other words, your order will be executed only if the price comes to your pre-determined price level.

For instance, let's assume the price of Bitcoin is $8000, and you decide to enter and buy once the price make a correction and fall to $7800. In this case, you should use the limit order and set your limit price at $7800 and click "Buy". Your order will be activated only if the price comes back down and reach $7800.

Step 5) Set A Stop-Loss to Limit Your loss

In order to succeed and be profitable, you need to practice proper risk management. One of the essential risk management practices is setting a stop loss to limit your losses.

In BitMex you can set a stop loss by using the "Stop Market" order. Simply click on the stop market order, and set the desired price that you wish to close your losing order.

For Example, let's assume you believe the price of Bitcoin is going to rise from $7800 to $8500. Thus you go ahead and open a buy order at $7800 and you are willing to risk only $300 (Exit the market at $7500). In order to set a stop loss for this trade, all you have to do is to open a sell stop market order at $7500.

Simply, under the stop market order tab put the same quantity that you entered the market (if you wish to close the entire position, or enter half the quantity that you entered with to close only 50% of your position) and set the stop price at $7500.

Once the market goes against your prediction and reach the $7500 price level, your order will be automatically closed and you will not lose anymore if the market continues to fall below $7500.

For sell orders, you can set stop loss order by setting the "Buy Stop Market" orders.