Monday, 26 November 2018 07:34

How To Margin Trade Using Bitmex: Shorting/Longing Bitcoin

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As a cryptocurrency trader or investor, you've probably come across plenty of discussions about margin trading, also known as leverage trading.

In general, anytime the discussion turns to margin trading, there are two reactions:

  1. Unmitigated fear from inexperienced traders
  2. Experienced traders urging caution and practice

The reason for such a drastic split in regards to margin trading sentiment is that trading with leverage is risky business. Essentially, you're borrowing assets to magnify your returns -- the obvious downside is that if your profits are magnified, so are your losses.

Traders use leverage because it allows them to take positions that are larger than their current asset balance. Say you have 1 BTC but want to open a position that represents 10 BTC worth of trading power. Using Bitmex's margin trading platform, you can take up a 10:1 position valued at 10 BTC.

If bitcoin prices move in your favor, then you reap the benefits of a 10 BTC position while only *actually* having 1 BTC in your wallet. However, if bitcoin prices move against you, you can lose big as well (but not as bad as you might think -- we'll discuss this later in our section on Bitmex's Limited Risk Contract).

Short Bitcoin Using Bitmex

Margin trading (or trading with leverage) refers to either *shorting* bitcoin or another cryptocurrency asset or *longing* bitcoin or another cryptocurrency asset.

* Short position: Taking a short position means you are betting that the price of bitcoin will go down.
* Long position: Taking a long position means you are betting that the price of bitcoin will go up.

Whether you take up a short or long position on Bitmex, you aren't directly buying actual bitcoin in the process. Instead, you're buying a contract that is backed by bitcoin in the amount calculated according to how much leverage you use. The point of trading with leverage is to access more trading power/value than you have access to based on your wallet value alone.

How to Open a Bitmex Account

Opening a Bitmex account to start trading is a simple process that can be done relatively quickly.

  1. Head over to BitMex.com and register your new account. Provide an e-mail address which you'll need to verify after submitting. After you verify your e-mail with BitMex, it is critical that you set up two-factor authentication (2FA) on your account for security reasons.
  2. Using the account tab at the top of the page, find the deposit button and open up the wallet you'll be depositing to (deposit bitcoin in the bitcoin wallet)
  3. Once you've deposited bitcoin in your wallet and it's gone through the necessary confirmations, you'll see your account balance load up -- it's time to trade.
  4. Click the trade button at the top of the screen and choose which market you'll be trading (bitcoin, cardano, ripple, ethereum, litecoin, bitcoin cash).
  5. Create a position by entering your position's details on the left side of the screen. This will include specifying the amount of leverage you'll be trading with on the slider provided by Bitmex. The quantity field will show you the overall value of the position you're opening based on the amount of leverage you're using and the amount of BTC you're opening the trade with.
  6. If everything looks right to you, you'll only need to decide whether to go long or short before opening your position. Clicking buy market will take you to a long position, clicking sell market will take you to a short position. After reviewing your positions details and making sure that the risks associated with losing your position are acceptable to you, click buy or sell to open your position.

Tips for Margin Trading Bitcoin on Bitmex

  • The more leverage you use, the more likely you'll be liquidated. Many traders are tempted to use more leverage since it means the amount of funds at stake is less. However, the more leverage you use, the less bitcoin's price has to move for your position to be liquidated. Therefore, the more leverage you use, the greater the odds you'll lose the trade.
  • Don't use more than 25x leverage, 5x to 10x at most. For most traders, the sweet spot is 10x leverage. Let's say you take a small short position with a margin requirement (the amount necessary to buy into the trade) of .1 BTC. With 10x leverage, you're effectively trading with 1 BTC. If the price of BTC falls 10%, your position will be liquidated, causing you to lose your initial margin amount (.1 BTC). However, if the price rises 10%, you'll profit 100% on your initial margin amount. The less leverage you use, the more the price will have to move before you incur significant losses.
  • Start small. Don't start margin trading with large amounts. Margin trading is a very fast-paced and risky environment - if you're new to it, you'll need to spend a significant amount of time learning the ropes to protect your capital. [Use Bitmex's testnet](https://testnet.bitmex.com/) to paper-trade before putting real funds on the line.
  • Research, research, research. Make sure you understand all of the ins and outs of margin trading before attempting to use live cryptocurrency funds.

Bitmex's Limited Risk Contract

On Bitmex, your profits can exceed 100%, but your losses can not. That's great news for traders, especially those who have experience trading futures contracts on CME and CBOT exchanges where losses can exceed 100%.

Bitmex uses a Limited Risk Contract which states that regardless of how much the market moves against your position, you can only be held responsible for up to 100% of your initial margin amount. So, if you take up a short worth 1 BTC using 10x leverage and the bitcoin market rises 15%, you'll be liquidated for 1 BTC, not more. If, on the other hand, the market dumps 25%, you'll profit 250%.

Click here to register and start trading on Bitmex. Using this link will give you 10% discount in fees for 6 months

 

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