What is margin trading?

On the BitMarket.pl exchange you can trade on margin in two ways: by taking a long or short position.

Short position (you make profit when the price goes down)

If you expect the price of bitcoin (or litecoin) to fall, you will take the so-called short position. This is how it works:

  • You borrow bitcoins from us, which you sell for PLN (you open a position this way).
  • As collateral for the position, you put up a certain amount of bitcoins which represents a fraction of what you have borrowed (depending on the so-called leverage).
  • You wait for the price of bitcoin to fall.
  • Once the price falls, you buy bitcoins back for PLN you received from the sale (you close a position this way). Because the price was lower, you have now more bitcoins than you borrowed from us when you opened your position.
  • You give us the borrowed bitcoins back and keep what is left as your profit.
  • Of course, the price of bitcoin may also rise, which means you will be able to buy back for PLN fewer bitcoins than you borrowed. In such a case, you will make a loss – to cover the difference we will collect the amount of the shortfall from the amount you put up as collateral for the position.

Long position (you make profit when the price goes up)

If you expect the price of bitcoin (or litecoin) to rise, you take the so-called long position. This is how it works:

  • You borrow PLN from us, for which you buy bitcoins (you open a position this way).
  • As collateral for the position, you put up a certain amount of bitcoins which represents a fraction of the value of bitcoins you bought (depending on the so-called leverage).
  • You wait for the price of bitcoin to rise.
  • Once the price goes up, you sell some of the bitcoins to give us back the amount in PLN (you close a position this way). Because the price rose, you are left with some bitcoins which represent your profit.
  • Of course, the price of bitcoin may also fall, in which case you will have to sell more bitcoins to pay back the sum you owe us in PLN. In such a case, you will make a loss – to cover the difference we will collect the amount of the shortfall from the amount you put up as collateral for the position.

Advantages of margin trading

Unlike in the case of regular exchange trading, by using leverage you can multiply your profits many times over in relation to the sum invested. This is because all you invest is the security deposit (margin) you put up to secure your position, which amounts to a fraction of the sum you trade.

Certainly, if the price of bitcoin behaves differently than you expected, your loss will be proportionally higher. To avoid this, you can place the so-called Stop Loss order which will automatically close your position at a specified loss threshold. You can find out more about how to protect your investment against losses in this article.

Example of a short position

Let’s assume that bitcoin is trading at PLN 2000. You take a short position of PLN 10000 with a leverage of 1:4. This means that to open a position, you will:

  • Borrow from us 5 BTC which you then sell on the exchange for PLN 10000.
  • Put up 5 BTC/4 = 1.25 BTC as margin. This amount is collected from your account when the position is opened.

If the price of bitcoin drops to PLN 1900, then when the position is closed:

  • You will buy bitcoins back for PLN 10000, which at PLN 1900 per bitcoin works out to 5.26315789 BTC. 
  • You will give us back 5 BTC you borrowed and keep 0.26315789 BTC as your profit.
  • The margin of 1.25 BTC is refunded to your account.

So, after closing the position you will have 1.51315789 BTC worth PLN 2875 versus 1.25 BTC worth PLN 2500 you invested to open the position. This way, you made a profit of 21.05% (calculated in bitcoins) or 15% (calculated as the equivalent of bitcoins in PLN), even though the price changed by only 5%. This is possible thanks to the use of leverage.

However, if the price of bitcoin rises to PLN 2100, then when the position is closed:

  • You will buy bitcoins back for PLN 10000, which at PLN 2100 per bitcoin works out to 4.76190476 BTC.
  • We will collect the shortfall of 0.23809523 BTC from your margin, so you can give us back 5 BTC you borrowed.
  • The remaining balance of your margin, i.e. 1.01190476 BTC, is refunded to your account.

Example of a long position

Let’s assume that bitcoin is trading at PLN 2000. You take a long position of PLN 10000 with a leverage of 1:4. This means that to open a position, you will:

  • Borrow from us PLN 10000 for which you buy 5 BTC on the exchange.
  • Put up 5 BTC/4 = 1.25 BTC as margin. This amount is collected from your account when the position is opened.

If the price of bitcoin rises to PLN 2100, then when the position is closed:

  • You will sell bitcoins to get back the sum of PLN 10000 you borrowed, which at PLN 2100 per bitcoin means you will be selling 4.76190476 BTC.
  • You will give us back PLN 10000 you borrowed and keep the bitcoins you did not sell, i.e. 0.23809523 BTC, as your profit.
  • The margin of 1.25 BTC is refunded to your account.

So, after closing the position, you will have 1.48809523 BTC worth PLN 3125 versus 1.25 BTC worth PLN 2500 you invested to open the position. This way, you made a profit of 19.05% (calculated in bitcoins) or 25% (calculated as the equivalent of bitcoins in PLN), even though the price changed by only 5%. This is possible thanks to the use of leverage.

However, if the price of bitcoin drops to PLN 1900, then when the position is closed:

  • You will sell 5 BTC you bought, which at PLN 1900 per bitcoin works out to PLN 9500 which you give us back.
  • In order to pay back the missing PLN 500, you will also sell 0.26315789 BTC out of your margin.
  • You are left with the margin of 0.98684210 BTC, which is refunded to your account.
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