Classic trading takes place using the cryptocurrency trader's own funds. They deposit fiat currencies into the exchange balance and then execute trades. However, this is not the only way to buy — crypto exchanges allow borrowing funds. Thus, a trader can trade using borrowed money. Let's consider the advantages and disadvantages of this method.

The Concept of Margin Trading

Funds are provided with the condition of repayment, and the loan is also subject to a commission fee. This method allows you to earn more since you can borrow a fairly large sum. Margin trading is often referred to as trading with leverage.

What a Trader Needs to Know

Before borrowing, a trader must fully understand the following rules:

• the trader contributes a portion of the loan amount;
• it can be used for long and short positions;
• leverage — the ratio of borrowed funds to margin;
• if the market moves against the open position — a sharp drop is accompanied by a margin call. A margin call is the requirement to deposit a larger amount to secure credit trading to meet minimum requirements. Failure to meet the call leads to position closure and partial withdrawal of collateral.

Advantages and Disadvantages

Margin trading provides traders with the following advantages:

• allows easy profit enhancement, trading can be conducted even in falling markets;
• even a trader with small capital can open several margin trades;
• the trader doesn't need to deposit a large amount of their own fiat funds.

The disadvantages are quite serious:

• the trader must have certain experience — spot trading has very small risks compared to margin trading. The leverage multiplier can result in losses that are many times greater than the initial investment;
• inexperienced traders often receive margin calls, although they could easily avoid them by using stop-loss orders. This is exactly the recommendation given by experts.