What is Cryptocurrency Margin Funding?
Margin funding is a mechanism put in place by cryptocurrency exchanges to give traders higher liquidity in their trading activities. It usually allows the trader to borrow more than the amount of cryptocurrency they have for the trade.
For example for a margin funding that has a leverage of 4:1, the trader could borrow four times the amount they have made available for the trade. This means that if the trader wanted to buy bitcoin valued $400, they would have to put down $100 of their own money.
The trader has directly borrowed the fund to increasing their ability to purchase and trade a higher volume of Bitcoin. This is particularly essential in boosting the trader’s ability to make more profit while trading cryptocurrencies.
However, this fund has been provided by investors who may not be traders and so are expecting to make their own profits through lending out their funds through margin funding. Therefore, the traders eventually would pay some interest on the borrowed funds.
Margin funding is attractive for investors since they’re sure to make profit on their investment. The exchange ensures this by making sure that the trader does not lose the fund they borrowed even if their own fund is lost in the trade. This is accomplished by the exchange by tracking the trade made with such borrowed funds and stops the losses before it affects the borrowed fund.
This third party funding option is available in some of the biggest exchanges and the trader can access them by opting to be matched with available fund through the matching engine. This could be with one or more financiers. Another option is bidding through the financing order book of the exchange.
The advantage of using the matching engine is that it matches the trader with available funds taking cognizance of the best funding deals on the order book.
Another positive derivative from margin funding is that debar the interest paid by the trader after concluding the trade, the financing order book is practically not distinguishable from the trading order book. So after the trader secured the funding, they can proceed to trading with the fund normally as if it belongs to the trader.
The terms of the crypto margin funding are all available at the financing order book when the trader accesses them. For instance, a trader would negotiate the interest, the amount needed and other favorable terms with the recipient. There is also room to change the financing party if the trader finds more favorable deals.
It is important to note that the trader’s personal assets with the exchange is a sort of collateral which is monitored by the exchange which could liquidate it and pay the financier if the trader incurs losses that threatens to wipe out the financier’s funds.
There are certain risks associated with financing since the trader extends their risks to the financing third party. Considering the volatility in the price of cryptocurrencies, interference by the exchange to protect the margin funding provider could lead to unexpected losses by the trader.
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