What is initial margin? How is the Initial Margin different from the Requirement Margin, Variation Margin, and Delivery Margin? When applying Crypto investment, you cannot ignore this type of deposit. Please refer to the article below with Crypto Trading to get an overview of Initial Margin!
Answer What is initial margin?
These are also known as initial margins. This is the minimum amount that investors must deposit on the total value of the purchase order. The initial margin rate is calculated based on the value of the collateral assets and based on market fluctuations.
The role of What is initial margin in virtual currency trading
In cryptocurrency trading, margin trading plays an important role. For traders, it allows them to borrow money from the exchange to increase their initial investment capital. After borrowing capital, users can set up a paper wallet or electronic wallet to store and protect assets safely and effectively.
Margin trading is very suitable for traders who do not have much capital but still want to optimize profits. If you accurately predict the market trend, this trading method will help you earn huge profits.
For cryptocurrency exchanges, Margin trading contributes to attracting many traders and bringing in profits from margin lending interest rates. The exchange will receive back the principal amount along with interest, taxes, and transaction fees related to the Margin order that the user set up.
Calculation formula What is the initial margin?
The formula for calculating the initial margin is as follows:
Initial Margin = Transaction price x Contract multiplier x Number of contracts x Margin ratio
In there:
- The reference price is the transaction price at the beginning of the day.
- The trading price of the day is the closest matched price.
- The trading price at the end of the day is the closing price.
See more: Instructions for using margin effectively for trader
Evaluate the advantages and disadvantages of What is initial margin when making Crypto Money
From the above sharing, you have understood What is initial margin and calculation formula. To know the pros and cons of margin trading, you can refer to the information below.
Advantages of Initial Margin when applying Crypto investment
Applying initial margin trading gives traders the opportunity to earn high profits without needing a lot of invested capital. If the position is closed successfully, you will earn a “huge” profit compared to normal.
This is the outstanding advantage of it when compared to Spot order trading. So What is a spot order? Spot order trading is a form of Crypto trading that takes place immediately, at the current market price. Cryptocurrencies are transferred directly between sellers and buyers.
When the market is downtrend (tends to decrease in price), traders can still make profits. To do this, investors need to open short positions. For example, if a trader expects a large price drop, he can commit part of his portfolio to a short position. The profit gained will compensate for the loss incurred during a sale.
Limitations of What is initial margin?
High profits always come with many risks. For it, investors may encounter the following risks:
- Risks from market price fluctuations: The cryptocurrency market has a fairly large range of price fluctuations. If the coin price increases, traders will make more profits. However, if the price moves in the opposite direction, traders may face losses.
- Risk from traders themselves: This risk comes from inaccurate market analysis and prediction of Crypto price trends. Besides, there are traders who use high leverage. When the market shows signs of going against predictions, traders will lose even more.
- Risk of position liquidation: If the market goes against the trader’s prediction and the balance in the margin account is not enough to maintain the position, the trader’s order will be liquidated. At this time, the trader may lose the initial deposit.
See more: Opening an Bybit exchange account for traders
Distinguish Initial Margin from Variation Margin, Delivery Margin, Margin Requirement
Besides the Initial Margin, traders can apply other forms of margin to earn Crypto money, including Margin Requirement, Delivery Margin, and Variation Margin. So what is the difference between these forms of deposit and What is initial margin? Let’s find out more about Crypto Trading.
What is the Variation Margin in Margin trading activities?
Variation Margin is also known as variation margin. This form of margin is determined according to the profit/loss of positions during the trading session on the trader’s account. For existing positions, the transaction price is compared with the price at the end of the previous trading day or the settlement price for opening the position. For positions closed during the day, the settlement price is compared to the previous trading day’s closing price or the settlement price for opening the position.
If a portfolio position on a trader’s account has a loss, the Variation Margin value will be included in the required maintenance margin value. The formula to determine the Variation Margin is as follows:
Variation Margin = (Price level 1 – Price level 2) x Number of contracts x Contract multiplier
Difference between Initial Margin and Delivery Margin
Different from the Initial Margin, the Delivery Margin is the margin value that the seller and buyer are obligated to maintain from the last transaction date to the final payment date. The purpose of this form of deposit is to ensure that both parties carry out the contract. For Delivery Margin, traders (buyer and seller) will deposit a deposit in money.
Distinguishing Margin Requirement in Crypto monetization activities
Margin Requirement is a form of margin required to maintain requirements. The margin requirement represents the total margin value that investors must pay to maintain positions during a trading session. It includes the Initial Margin, Delivery Margin, and Variation Margin.
A trader’s trading account can open a new position when the margin usage ratio is below the warning threshold. In case the warning threshold is exceeded, the trading account will be suspended. At this time, the trader will have to reduce the position or pay more margin.
The formula for calculating the required maintenance margin is as follows:
Margin Requirement = Variation Margin + Initial Margin
Conclude
Hopefully, through the above article, readers have understood What is initial margin and the types of margins in Margin trading. This is a highly profitable form of trading that traders should not ignore. To update the latest trends in the cryptocurrency market, don’t forget to read the articles at Crypto Trading!
FAQs
Below are frequently asked questions about Initial Margin when applying Crypto investment.
What is the interest rate for margin trading loans?
Loan interest rates depend on the regulations of each business doing business in the Crypto field. This interest rate is usually around 0.03%/day. Loan maturity is within 90 days.
What is leverage in Crypto trading?
Leverage here refers to the use of borrowed capital to trade digital assets. Leverage allows you to buy/sell with capital greater than your initial investment. Depending on the exchange, users can borrow up to 100 times their account balance.
What positions are available in margin trading?
Margin trading has two positions: Long and Short. Long positions are opened when traders predict an uptrend in the market. On the contrary, a Short position is opened when you predict a downward trend in Crypto prices.
