Trading on margin allows traders to borrow money or crypto assets from a brokerage or exchange in order to purchase an asset using leverage, or even to take a short position. The money borrowed is loaned out by the brokerage and offered to the customer, granting them additional buying power to execute trades. Thus, margin allows traders to buy more of an asset than they would usually be able to purchase with their base holdings, and also can be used to take a short position.

In order to trade using margin, traders will need to complete the margin trading agreement and be approved for the margin program. Once approved, they will need to deposit initial collateral into their main account and then transfer the collateral to their margin account. Certain eligibility requirements do apply.

Let’s walk through a couple of examples of potential margin trades:

Example 1:

Bob wants to use margin on CrossTower. Bob has been holding a single Bitcoin and is extremely bullish, he wants to use his Bitcoin as collateral to open a levered long position. Bob can use margin to enter a position for the equivalent of 2 BTC, utilizing 2x leverage. 

Lets say BTC is trading for $40,000. Bob would move the BTC that he holds into his margin account. After doing this, his margin buying power would allow him to purchase up to an additional 1 BTC. Bob executes the trade, and he now has 2 BTC and a margin loan of $40,000

Scenario 1:

Bitcoin is on a tear and trades up to $50,000 over the next several days, a 25% gain. Because Bob owns 2 BTC in his margin account, his unrealized gain from the move is 2x $10,000 = $20,000. The value of his margin loan remains unchanged at $40,000. Overall, his account equity is now $60,000 (2 BTC @ 50k, minus the 40k margin loan), up from only $40,000 when he put on the margin trade. Bob has realized a 50% gain while the market has only seen a 25% gain by utilizing 2x margin leverage.

Scenario 2:

Bitcoin drifts lower over the next several days and is now trading for $36,000, a decline of 10%. Bob’s 2 BTC in his margin account is now worth $72,000, but the value of his margin loan remains unchanged at $40,000. Bob’s account equity has decreased from an initial value of $40,000 to $32,000, a 20% loss even though BTC prices have only fallen by 10%. Just as utilizing 2x leverage helped Bob capture twice the market move to the upside, it also means that he experiences twice the loss to the downside.

Example 2:

Bob thinks that the Bitcoin market has gotten too hot and is overextended, he wants to use his CrossTower margin account to take a short position, which will make money in the event of a market decline. Bob deposits $40,000 into his margin account as collateral and takes a margin loan. This time, in order to take a short position, the margin loan is in BTC instead of in USD. Bob borrows 1 BTC and sells it short. Bob executes the trade, selling 1 BTC short. After the trade, his account equity is $40,000, comprised of $40,000 in collateral, an additional $40,000 in proceeds from the sale of the borrowed Bitcoin, and a margin loan balance of 1 BTC (currently valued at $40,000).

Scenario 1:

A wave of sellers come into the BTC market and prices start dropping, and BTC declines 20% to be trading at $32,000. Because Bob has a short position, he wins when prices fall. In this case, he is utilizing the margin account to initiate a short position (short sales cannot be executed in a non-margin account), but he is only utilizing 1x leverage for this trade. After the price decline, Bob’s account equity is now $48,000, which is made up of his initial $40,000 collateral plus the $40,000 in proceeds from his short sale, minus the loan value in BTC, which has declined from $40,000 to $32,000). Bob has realized a 20% profit during the market selloff.

Scenario 2:

Bitcoin finds its footing and continues to rally, pushing up to $50,000, a 25% gain. Because Bob has a short position, he loses money as BTC rallies. In this scenario, when BTC hits $50,000, Bob’s account equity drops from $40,000 initially down to $30,000, a loss of $10,000. Bob’s cash position remains the same as it was in scenario 1, however his margin loan is still 1 BTC. In this scenario, the value of Bob’s loan has increased to $50,000. Not only is he losing money in this scenario, but his leverage has increased as his account equity has decreased. Bob initially started with 1x leverage on his short position, but now he is up to 1.67x leverage ($50,000 loan value / $30,000 equity value). Bob might need to think about reducing his risk and covering some of his short position if prices move much higher.

CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.