An entirely new world of commerce and economy opened up in 2009 when Satoshi Nakamoto introduced Bitcoin. The way in which the currency functioned and the concept of ‘mining’ intrigued a lot of experts in blockchain technology. It mandated that the persons who needed to own or rather ‘create’ new bitcoins essentially needed to have powerful computers with extremely high processing speeds and memory.
For a brief moment, Bitcoin was accepted as a means of transaction in the mainstream world of business (we are not talking about the dark web where Bitcoin is the only currency accepted!). Even in spite of this progress, the bitcoin remained largely evasive to the common person, and it meant that experts in commerce and trading had no way to benefit from cryptocurrency as a currency more than being just a manifestation of technology.
All this changed when cryptocurrency exchanges were introduced. Cryptocurrency exchanges are a direct consequence of the growing number of cryptocurrencies – at the time of writing this article, there are 2945 cryptocurrencies in operation.
It is quite known that the possibility and the magnitude of profit in any exchange-based ecosystem depend on the volume of investment – or the capital. It is also known that the fees charged by the exchange are proportional to the profit made by the traders. What if, in an endeavor to increase the profit of the trader and the fees of the exchange, there was an additional credit issued to the trader to participate in a trade?
The answer to this million-dollar question, literally, is cryptocurrency margin exchange or cryptocurrency leverage trading exchange. Although the vocabulary might sound intimidating, the concept of leverage is quite simple to understand.
Leverage as a multiplier
Based on the exchange’s financial breathing space, each exchange gives its own leverage represented as a multiplier of the initial investment that a trader is willing to make. The initial investment is referred to as the margin.
Exchanges give leverages of 2x, 5x, 10x, or even 100x. This, respectively, means that if a trader has $1, they can, in that order, participate in a position that requires them to have $2 or $5 or $10 or even $100.
What does it mean for a trader?
For a trader, it brings two key advantages. The first, obviously, is that they can maximize their profits. Second is that they will be able to open up positions that might have otherwise been restricted because they do not have sufficient capital.
Let us illustrate this with an example. Let us take, for example, the price of a bitcoin is $100. The value of the bitcoin is expected to go up by $10 and is expected to reach $110 in the next few weeks. In the classical system of trading, if a trader had $100, they can buy bitcoin, wait for the price to go up, sell it for $110, and reap a profit of $10.
If an exchange were to give them a 10X leverage, instead of investing $100, they have $1000 to invest. This would also mean that instead of making a $10 profit, they have now made a $100 profit. They could return the borrowed amount and retain the profit that they have made.
If the price of a crypto asset that is expected to assuredly appreciate in value was at $500, an investor with $100 can never contemplate buying it even if their intelligence has predicted the price rise. However, with margin trading or leverage trading, the trader can also open up these positions that would have otherwise been inaccessible.
Crypto exchanges with leverage eliminate the need for intermediaries and middlemen to make borrowing possible for traders. Since the exchange itself facilities the leverage, the interest rates are expected to be considerably low. This presents a win-win situation for both the traders and the exchange. More often than not, since there are no other parties involved, the transfer of the borrowed funds is almost instantaneous. Therefore, if a trader finds an opportunity lucrative, they can immediately use the leverage amount to execute the trade. Given the magnitude of the volatility of crypto assets, time is of critical importance, and even a few hours lost can mean a few thousand dollars lost in profits.
Demystifying long and short trading
The example that we have seen above represents long trading. It assumes that the price of an asset will ‘elongate’ or increase in its value over time. However, there is a different kind of trading called short trading which expects the price of an asset to drop down, and even with the drop, a trader can still make a profit.
Long trading is simple to understand and has been the classical definition of any training methodology, including forex and stock exchanges. Short trading, however, is a bit complicated. It involves selling a crypto asset at a higher price and repurchasing it at an assured later date at a lower price. The price difference will be the profit of the trader.
It is to be noted that for a trader to perform short trading, the exchange essentially needs to provide the facility of leverage trading.
What does leverage trading mean for an exchange?
It has already been observed that the profit made by an exchange is proportional to the profit made by a trader. It is only natural that an exchange has a better commission from the profit made by a trader, and in that endeavor, the exchange opens up new trading opportunities. The leverage provided by an exchange is, in essence, a loan to the traders. Therefore, just like any other traditional loan, an exchange can charge interest on the leverage amount, and that translates into an additional revenue channel for the exchange.
It is not a complete bed of roses for a trader. As much as there are possibilities for amplified profit, there are also possibilities for amplified losses. This means that instead of losing a specific amount, the trader tends to lose an amount multiplied by the leverage. This might end up completely wiping off their capital.
How do exchanges deal with losses?
The exchange lots up a certain portion of the traders’ capital and uses that amount to recover its losses. The trader cannot participate in a trade by using that locked up amount, and it is solely designated for the purpose of recovering losses.
Even if the traders face a loss, the exchange can still charge a commission for the transactions and the interest for the leverage amount. The amount earmarked to recover losses is calculated based on multiple parameters like the multiplier, the history of trading and transactions by the trader, and of course, the actual capital or the margin of the trader.
How can traders minimize losses?
There is always a possibility to arrive at a fine point between safe profit and exorbitant profit. As much a cryptocurrency exchange with leverage provides an opportunity to maximize profits, it also gives a lot of tools and options to minimize the possibility of losses.
Traders can use an insurance option to protect their margin amount from being deleveraged by the exchange. They can also use this insurance amount to extend the repayment window.
Another option provided by exchanges is the option to stop loss and take profit. Basically, what this option does is that it automates the stopping of waiting for higher profits or lower losses, and automatically sells the crypto asset. If, for example, the stop loss amount has been set at an absolute $90 for crypto coins purchased at $100, the exchange will automatically sell the crypto coin at $90 to prevent further losses. On the positive side, the crypto exchange will automatically sell the coin if the price increases to $110, irrespective of the price moving further up. This method is one of the key features to look for in an exchange that offers leverage.
Leverage exchanges also provide traders with an option to close orders partially. They can partially close the order and withdraw their profit while still continuing to trade with the remainder of the order.
There is no question that crypto exchanges with leverage present lucrative opportunities to traders in exhibiting and making a profit from their trading prowess and their understanding of the apparently chaotic crypto market. In addition, it also presents an interesting business opportunity for aspiring entrepreneurs to make a profit out of the sheer uncertainty prevailing in the crypto space.
If you are one of the aspiring entrepreneurs who would like to ensure a massive chunk of profit from crypto exchanges, all you need to do is approach a blockchain app development company that specializes in margin trading exchange development. There are a few essential features that stand as a marked difference between a normal exchange and an exchange with leverage. The features include advanced security, a meticulously formulated fee structure, and methodologies to reduce the magnitude of risk.
White label cryptocurrency exchange software with leverage is bound to save you quite a lot of money and time, and the customization options provided by the development companies ensure that the exchange bears your brand language in every possible aspect.