On November 29 there were quite a few bitcoin market spikes, and so-called flash crashes on exchanges, according to traders on social media and forums. One particular group of traders that really felt the storm when markets got turbulent were margin traders on exchanges like Bitfinex. In fact, if one were to visit the Reddit forum /r/bitfinex that day,they would see a whole bunch of angry customers who were burned buying bitcoin on a margin.
Buying Bitcoin On a Margin
Many people trade bitcoin on exchanges and understand how to place a buy or sell order and interact with the trading platform’s operations. However, there are other methods of exchange on cryptocurrency trading platforms and brokerage services called ‘margin trading.’ Buying on a margin is borrowing money from the exchange, so you can obtain a profit in the short term by placing a long or short bet on a specific digital asset with loaned capital.
Margin trading is far riskier than basic trading. Essentially, individuals with a limited amount of crypto-capital can add leverage to their base investment. For instance, if you hold two bitcoins the exchange allows you to open a margin position with leverage (loaned money) based on your initial capital. Exchanges like Bitfinex, Bitmex, Kraken, Bittrex, and Poloniex all offer these types of trades, and some of them allow other customers to provide the lending material. The risk a margin trader deals with is that they are gambling with loaned money and the market may not follow their predictions…