There are occasions when cryptocurrency markets experience an imbalance in price. It is perfectly legal for investors to take advantage of such opportunities and gain an enormous reward by engaging in arbitrage margin trading. Borrowing money from a broker to exploit such opportunities may come with its risks, but financial leverage remains one of the most important cornerstones embraced by successful cryptocurrency traders.
Put simply, arbitrage margin trading involves the borrowing of money from a broker, and using the same to invest in a commodity such as cryptocurrency, in order to profit from an existing imbalance in its price across different financial markets.
How Does It Really Work?
The need to be a rocket scientist is not required in order to make good profit this way. This involves the few steps listed below to be taken:
1. Open A Margin Account: The common practice is to open an account for this purpose. Margin accounts, as they are known, are designed just for the purpose of borrowing money from a broker which is used to purchase securities.
2. Deposit Securities: The value of money allowed by a cryptocurrency investor depends on the value of securities deposited with a broker. Whenever the securities deposited decline, it is typical to get margin calls from a broker requesting that securities be sold or cash deposited to cover for any shortfall.
3. Interest: As with every loan account, interest is expected to be paid on the advance received by a trader. Interest rates are periodic and typically not hidden from borrowers.
4. Invest in Cryptocurrency: With the additional money in the disposal of a trader, it becomes possible to buy more than would have been the case using available funds alone.
What Is The Effect Of Arbitrage Margin Trading On The Market?
Interestingly enough, arbitrage makes it possible for sanity to exist in the cryptocurrency market. This is because a difference in price should not exist as cryptocurrency remains the same regardless of the financial market.
However, for various reasons, differences in price exists from time to time. As arbitragers take advantage of such situations, the markets are able to erase the imbalance. If investors were to trade with the funds they have alone, there may not be enough to take advantage of such occurrences which helps to promote a stable price of cryptocurrencies across various markets.
There is one major winner, really. Investors who take advantage of arbitrage margin trading are in a better position to make more profit.
1. They are taking advantage of the imbalance in price to make some gains without investing a dollar of their own.
2. More profit is made as it allows for more cryptocurrency to be bought than would have been ordinarily possible. Once interest is taken off, whatever balance that remains is an investor's profit.
Since an investor is expected to collaterize what is borrowed using securities, nothing is lost at all. Everyone wins as the broker lends funds that would otherwise have remained idle, the profit-making capacity of an investor increases and the imbalance in the various markets taken care of.