I’m going to be focusing on cryptocurrencies for a while, as I’ve found a great, medium risk way to invest in the market by using the ‘margin funding’ functionality on Bitfinex.
In the first section I briefly describe how margin funding works. In the second section, I detail the risks involved with margin funding cryptocurrencies. In the final section, I have gathered some links for already tried and tested websites to help people who are interested in getting started with margin funding cryptocurrencies.
cryptocurrency margin funding – how it works
As with fiat currencies, there are people who day trade cryptocurrencies – they buy low, sell high. To better leverage their position, some websites offer day traders the option of procuring margin funding, whereby a day trader can borrow money from people offering what are basically very short term, high interest loans. To protect the person making a loan, there is a safety mechanism; say, for example, that a day trader has 30 dollars. They can borrow an additional 70 dollars to use for day trading. Should their trade’s value drop below 85% of the initial investment, the system automatically closes their position and returns the funds to the person who made the loan. Whilst not completely safe, to me, this does make the proposition of margin funding worth considering as a medium risk investment.
cryptocurrency margin funding – the risks
It’s important to understand the risks involved with margin trading on Bitfinex and in investing in cryptocurrencies in general. Bitfinex give a clear description of how margin funding works here. They have also put up a risk disclosure statement, which is well worth reading before getting into margin funding. See here for their risk disclosure statement.
Finally, here’s some very good advice taken from this blog post.
Another thing to consider is that when a trader borrows money from you and takes a position, he also takes the risk in case the market price will move in an unfavourable direction. If the market moves so far against the trader that the trader is close to not being able to cover the loss with what is available in his trading wallet, then the trader will be issued a margin call and his position will be forcibly closed. But if the market moves so fast, that the forced execution of his position ends up giving the trader a negative balance, then the person lending the funds out to the trader can lose both – the generated interest and part of the principal.
It is extremely rare that lenders lose money due to margin calls in a fast-moving market, but it can happen and it is something worth considering. There is no magic here: you can’t expect to be able to lend out at high rates without there being any risk involved.
And final thing to consider is what happens if something happens to Bitfinex itself – either operationally so they can’t close out a losing trade or what happens if Bitfinex goes bankrupt. This is a concern for almost any BTC based platform out there due to their relative newness.
affiliate links for cryptocurrency exchanges
Some of the exchanges listed below offer rewards for getting people to sign up to buy and trade cryptocurrencies. If your going to sign up anyway, we may as well reap any offers:
Coinbase seems to be regarded as one of the better options for buying cryptocurrencies in the UK (see here). If you sign up using this link and then purchase $100 USD of bitcoin or more, we will both get $10 USD of free bitcoin. I checked out the verification process, they just required a passport scan and a mobile phone number.
Thai trading exchange
For a more complete set of buying and trading options, including options to purchase a wide variety of altcoins (Litecoins, Ethers, Dogecoins etc) directly with Thai Baht, bx.in.th offer a good service with a simple verification process. They don’t offer new customers much in terms of sign up rewards, but you can sign up by following this link.
International trading exchange
For trading, I use Bitfinex. Bitfinex offer probably the most advanced market trading functionality, including margin funding. To sign up, use this link and get a 10% discount off of your trading and margin funding fees for the first month following registration. The verification process is quite a bit more complicated than coins.co.th, but if you already have Bitcoins to send over, you don’t need to go through the verification process.
Buy me a beer for lots more info 😉