Geco.one is the first platform with PAMM accounts in crypto-market enabling everyone to safely invest in the cryptocurrency market using skills and knowledge of experienced traders. That allows you to invest in cryptocurrency pairs by entrusting your resources to experienced traders as well as providing you with all the tools necessary to become a crypto-trader yourself.
Now imagine BTC is at $100 (for example). You buy 1 BTC and the price moves up 10%. You made a $10 profit or 10% gain with spot trading.
With margin trading, imagine you have $100 and the exchange allows leverage of 3.3x and your initial margin will be 30%, now you can borrow an additional $233 for a total buying power of $333, so you can buy 3.33 BTC. When the price goes up 10% your profit has tripled to $33 or 33.33%. Using leverage can increase your return.
Initial margin is the minimum amount of Bitcoin you must deposit to open a position.
But with margin trading, there’s an interest rate applied! For example, the daily interest rate can be 1%, your daily interest cost will be $2.33. This interest rate is a variable rate and you will be only able to lock it in for 1 up to 30 days. If you are looking for a long-term trade, the cost of holding your position can destroy you. Especially if the price of bitcoin starts moving against you.
The third type of trading is futures trading. Most exchanges for future contracts require you to deposit BTC and don’t accept fiat currencies. Assume you have 1 BTC ($100 worth of equity). Assume that each contract is worth 0.01BTC (multiplier). 1 contract is worth 1 BTC at a $100 and the exchange can easily give you 25x leverage, which means you have to place 4% down as your initial margin. Which means you have a buying power of 25 contracts (equity / initial margin). The same 10% price change can make you a profit of 2.5 BTC or 250%. Because of the higher leverage, you can generate a higher return, however, you can also generate higher losses. A 4% price change against you and you will lose that 1 BTC you deposited. So be careful with using higher leverage. Stick to 3x or 5x leverage max.
But what’s the advantage over margin trading?!
There’s no daily cost of interest. The futures contract will either trade at a premium or discount. When you place a trade on a futures contract, you will know exactly how much interest you will be paying over the life of the contract.
An exchange with margin is where you can trade with leverage but you will pay a daily interest rate and bleed paying fees. The most popular exchanges are Bitfinex, Poloniex and Kraken.
An exchange with futures are exchanges where you buy/sell contracts and know exactly with the cost is over the life of a contract. Usually much cheaper than margin and due to the structure of futures, they offer insanely high leverage, low fees and potentially several magnitudes more profit.