Bitbns Introducing Digital Assets Margin Trading in India

Introducing Digital Assets Margin Trading in India
On 31st March 2018, we mentioned about interest rates on holding digital assets. That was a fairly simplistic way of putting it across. Today we’ll explain this in detail. We are offering interest rates on digital assets by connecting lenders with potential borrowers. This is called margin funding, and trading with borrowed assets is called margin trading. Let’s try and understand.

What exactly is margin?

Margin in its simplest form is a loan. As of now, you can trade with whatever amount you have in your Bitbns wallet. So, if you have 100 XRP, you can trade with 100 XRP only.

What if you have a strong understanding that the market might move in a particular direction, and you want to invest more than what you have? This is where margin comes into play. Here, a set of lenders can lend you a certain amount, and with that you can invest more than what you have. The lenders earn interest, the borrowers get to place larger orders. Overall a win-win.

Why is margin needed?

Margin trading works because of a concept known as ‘leverage.’ To understand how leverage works, let’s take an example of a home loan.

Eg:
Case 1: By taking a home loan

You buy a house worth: 50 lakhs
Using a home loan: 40 lakhs
Down Payment: 10 lakhs
Interest rate: 10% per year

Now, at the end of the first year, you will have to pay 10% of your loan or 4 lakhs to your lender. Let’s say that the value of your house has increased by 20% or by 60 lakhs.

You sell the home for: 60 lakhs
You return the loan with interest: 44 lakhs
Your total Profit: 6 lakhs. [Selling value — ( Loan + Interest + Downpayment)]

Case 2: No home loan
Now let’s say you bought a house with only the money you have in hand, without taking any loans. Again, let’s say the house value rises by 20% at the end of the year.

You buy a home worth: 10 lakhs
After 1 year, you sell it for: 12 lakhs
Your total profit: 2 lakhs

Notice how you made more money in the first case because you started with a larger initial amount. By leveraging, you have increased the profit by a factor of three.

Also note that if the value of the house had decreased by 20%, you will face a huge loss of 14 lakhs if you had taken a loan. And your loss would be relatively smaller amount of 2 lakhs without the loan. This is the reason why leveraging can be risky and should be done by experienced traders. Whether margin trading works to your benefit depends on how the market performs and how you trade.

On the other hand, the lender gains an interest of 4 lakhs regardless of the market. Lending money is considerably safer. The profit, however, is smaller in this case (compared to a 6 lakh profit.)

Let’s take an example w.r.t. crypto:

Imagine you have 100 XRP. And you want another 100 XRP. You can get that with the margin facility. Now the question is:

Why would I borrow funds as a trader?

Think you have 100 XRP you bought at INR 50 and sold at INR 55.

The profit you made was INR 500. But imagine if you could sell 200 XRP even though you only hold 100 XRP with you. The profit in that case would be 200*5 which is INR 1000.

Now you have just doubled your profit by using margin.

So margin essentially gives you a way to multiply your earnings. It can also lead to multiplying your losses. Let’s understand how margin works out if markets go up or down. An efficient trader can use margin in both the markets.

Read more here -- https://medium.com/bitbns/introducing-digital-assets-margin-trading-in-india-355a97a034c9