The digital assets market is a volatile sector where investors are always at risk of losing their funds. Within crypto trading practices, some trends are riskier than others, such as purchasing an NFT in a spur-of-the-moment decision. One such practice is called ‘margin’ or ‘leverage’ trading of crypto assets. Prevalent for a while now, the term made it to the headlines recently after the Canadian government decided to levy a ban on margin trading being offered as a service to Canadian residents by local as well as international exchanges.
Margin trading, also called leverage trading allows customers to borrow capital from a broker to invest in crypto assets. The broker can be an individual as well as an entity such as a crypto exchange that offers the service.
This practice enables traders to access more capital than what they originally have to bet on a crypto asset. This capital is backed by a collateral.
In simple terms, if a trader has Rs. 100 and the exchange being used offers 10x margin on Bitcoin trade, the trader will be able to place an order of up to Rs. 1,000.
While this can potentially lead to larger profits, it also increases the risk of major losses.
Canada prohibited exchanges from offering margin trading for Canadians as part of its recently released rules that aim to safeguard digital assets investors against financial risks.
Speaking to Gadgets 360, Rohas Nagpal, an Indian blockchain architect and the author of the Crypto Playbook, highlighted that the practice of margin trading is indeed, extremely risky to dabble in.
“Margin trading is very, very risky. If the value of the crypto that was bought and traded with borrowed funds goes down, the trader will need to provide more money to the broker to keep the trade open. If the trader cannot provide this, the trade will be liquidated at a loss. Because crypto is very volatile, traders can suffer huge losses,” Nagpal told Gadgets 360.
At a time when India is batting for global rules for the crypto sector under its G20 Presidency, Nagpal has advised the nation to follow Canada’s decision on exchanges offering margin trading.
“The government of India should ban crypto exchanges from offering margin/ leverage crypto trading as early as possible,” noted Nagpal.
Binance, the largest crypto exchange in the world, is one among many popular exchanges that offer margin trading services.
ByBit, Kraken, KuCoin, and Bitmex are also renowned crypto exchanges that offer the risky feature, Coinsutra had listed in a recent report.
Cryptocurrency is an unregulated digital currency, not a legal tender and subject to market risks. The information provided in the article is not intended to be and does not constitute financial advice, trading advice or any other advice or recommendation of any sort offered or endorsed by NDTV. NDTV shall not be responsible for any loss arising from any investment based on any perceived recommendation, forecast or any other information contained in the article.
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