Hong Kong-based cryptocurrency exchange Bitfinex announced the introduction of margin trading for USDT/USD on its trading platform, allowing users to trade Tether against the US dollar with up to 3.3x leverage.
According to a recent blog announcement, Bitfinex will open margin trading for the USDT/USD trade pair as of 11:30 AM UTC on Dec 21.
BitFinex also offers margin trading for more than a dozen other digital assets, including Dash (DASH), Ethereum (ETH), Litecoin (LTC) and Monero (XMR). Unlike some other exchanges, BitFinex only offers as much as 3.3x leverage, meaning your initial equity must be at least 30 percent of the position you wish to open.
Bitfinex, currently the sixth largest cryptocurrency exchange by monthly trade volume, is only opening stablecoin margin-trading against US, but has plans to introduce other pairings in the future, including introducing margin trading for other stablecoins once sufficient liquidity is reached.
With the meteoric rise of BitMex — the largest cryptocurrency margin trading platform, it is clear that the demand for new order types and opportunities for new trading strategies is booming. Now, it appears that Bitfinex is looking to boost its market status by catering to professional traders and making itself more appealing to institutional investors.
Tether (USDT) is the largest stablecoin by market capitalization and has by far the highest daily trade volume, currently sitting at almost 30x that of its nearest rival, TrueUSD (TUSD).
It comes as no surprise that Tether was chosen as the first stablecoin the exchange opens for margin trading, given that the CEO of Bitfinex is also the CEO of Tether.
What is Margin Trading?
In simple terms, margin trading is the process of borrowing funds from the exchange or a lending platform in order to open a trade that you otherwise could not afford. The process of margin trading essentially increases a trader’s buying power by allowing them to increase the amount of profit earned on each trade when the market moves.
A standard trade can be considered a trade at 1x leverage, meaning that the value of the opened position and the investment amount are the same. However, many exchanges, Bitfinex included, allow margin trading up to 2-4x leverage on some assets. BitMex, the most popular exchange for margin trading, allows up to 100x leverage on BTC and as much as 50x on other digital assets.
As an example, let’s say you wanted to open up a long position using $1,000 worth of Bitcoin (BTC), but you only have $500 in your balance. If you open a margin position at 2x leverage with your $500 balance, your position will be worth $1,000. This means that if Bitcoin increases by 10 percent during that time, you’ll have earned twice as much as you would have with $500. However, it also means if Bitcoin crashes and loses 10% in that time, you will lose 20 percent of your original investment.
Although margin trading has the potential to hugely accelerate profits, the same also works in the reverse direction — potentially allowing losses to accumulate much faster than they would when trading at 1x leverage. Margin trading is considered an advanced trading strategy and is best utilized by experienced traders that understand the risks involved.
It is relatively commonplace for new or inexperienced traders to suffer extreme losses after opening a high leverage position shortly prior to an adverse price swing. BitmexRekt has turned the unfortunate-but-common occurrence into a meme on Twitter — automatically tracking and publishing the most gut-wrenching losses.
Several exchanges offer margin trading for both long and short positions, allowing you to profit whichever way the market moves (assuming you’re correct). However, it is not recommended that you enter into margin positions unless you are an experienced trader, and are willing to potentially lose your entire investment.
What do you think about Bitfinex adding USDT/USD margin trading? Are there are any pairs you would like to see? Tell us your thoughts below!