With a tug-of-war going on between crypto and regulations, margin trading in the US is quite difficult. Here is a guide to simplify the process for the US citizens!
The much-anticipated tug-of-war between “cryptocurrencies” and “regulations” is truly up and running. From blanket bans to extreme taxes on profits to Bitcoin being legal tender, crypto regulations is one of the hottest topics currently. All this while countries and governments across the globe are trying their best to tame this wild beast.
Another fact is that when governments get involved, people take notice. So, even in this rough water, the net positive is that more people are getting to know about and trying to understand crypto. This may essentially translate into more people joining the crypto bandwagon to have their skin in the game.
However, while most regulations are policy whips being cracked to keep the citizens under control, there are certain rules that can have an ulterior positive attached to them. One of them is the rules around ‘margin trading’ and especially in the USA. Now, read along to know what margin trading is, the associated regulations, and more about them.
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What Is Margin Trading?
Most importantly, think of margin trading as a catalyst for your trading performance. If your bet wins, you can book extraordinary profits. If not, you need to repay more than your initial borrowed capital. Also, interest is charged which only amplifies the losses incurred by the trader.
Now having understood how margin trading works, let’s dive deep into the prominent risks a margin trader needs to account for.
Risks Associated With Margin Trading
Losses Are Magnified
As stated earlier, traders going wrong on margin trading calls can end up losing substantially more than they had initially invested. Unlike the spot market where traders can only lose their cash in hand, margin trading ensures the trader is indebted to the broker.
The Dreaded Margin Calls
For every dollar borrowed on margin debt, a percentage of equity i.e. spot holdings is locked as collateral. When the value of this equity falls below a certain value, a margin call is triggered by the broker. This is a call for the trader to add funds or liquidate equity to meet the collateral value. If the trader doesn’t tend to the call, the broker can sell the holdings to recoup the cash.
Liquidation of Collateral
Drawing reference from the previous point, the collateral locked against the margin loan can be liquidated by the broker if the margin call isn’t met. Adding to that, the remaining part of the loan is viewed as an unsecured debt. This is further reported to credit rating agencies where the trader’s credit score takes a hit.
Let us now delve more into the regulations in place with regard to margin trading.
Regulations Around Margin Trading for US Citizens
While the recent past has been a nemesis for the margin trading sect of the crypto market, do we have a way out? Let us find out.
How to Margin Trade in the USA?
There is only one authorized and trustworthy platform to margin trade in the US i.e. Kraken, a US-based cryptocurrency exchange and bank.
Individual clients must have more than $10 Million in invested assets (crypto, stocks, bonds, mutual funds, real estate).
All of them can be traded in pairs either with $BTC, $USD, $EUR, or $ETH.
The 1:5 leverage cap of Kraken is to substantially comply with the regulators and provide safe, yet, profitable margin trading opportunities to US citizens.
Fees on margin trading on Kraken are extremely competitive and they seem reasonable for the majority of the crypto population.
Fees up to 0.02% shall be charged to open a margin position and for every four hours of maintaining the ‘open’ position, a rollover fee of max 0.02% will be charged.
There is no denying the advantages offered by margin trading for users to leverage in the crypto market. However, they should never overshadow the innate potential of losses that can mount in quick time due to wrong bets. To protect traders against such calamities, regulators in the US have proceeded with a concrete wall around margin trading.
US citizens, even those living outside the US, shall have to forego the upside attached to margin trading. And with a negligible indication of this situation changing, margin trading will remain alien to the US for some more time. Until then, meeting the requirements of Kraken and playing with 5x leverage seems to be the best bet.