What is margin trading?

Imagine making a purchase with money you put in yourself plus money you borrow, leaving a deposit with the lender. That’s roughly how margin trading works on an exchange: you lock up your own funds as collateral and borrow extra money or crypto for your trade. Margin isn’t protection against losses.

For example, you put in €100 and borrow another €400, opening a €500 position. The leverage is 5x, meaning your position is five times your own capital. If you buy a cryptocurrency and its price rises 5%, your profit is €25 before interest and fees. If it falls 5%, you lose €25: a quarter of your own money, not 5% of it.

Why it matters

In a regular purchase without borrowing, you buy with what you have. In margin trading, you also take on an obligation to repay a loan. You can take a position betting on a rise (long) or, by borrowing and selling a cryptocurrency, betting on a fall (short). In the second case, you aim to buy it back later at a lower price to return it.

We think it’s crucial to separate the size of the position from the money we put in. A small initial amount doesn’t mean small risk. Also, margin trading isn’t the same as futures: with futures, the exposure comes through contracts, although margin is used as collateral there too.

What to watch out for

If your collateral no longer covers the platform’s requirements, you may be asked for additional funds (a margin call) or face forced liquidation. The position can be closed before all your initial capital is gone, without you having time to react.

Borrowing interest and fees eat into the result. With isolated margin, the collateral is limited to that specific position, while with cross margin it may also draw on other funds in your margin account. The exact rules vary by platform. Depending on the terms and how the liquidation is executed, you may still end up owing money.