What is margin trading and how does it work?

Summary

This article explains the concept of margin trading, the difference between going long and going short, and how leverage works.

What is margin trading?

Margin trading is a trading strategy that allows you to trade with borrowed funds, using your own euros as margin. This gives you the flexibility to take advantage of both rising and falling market prices.

At Bitvavo, margin trading offers two main directions:

Going long

You go long when you expect the price of an asset to rise.

• Borrow and buy: You borrow stablecoins, e.g., EURC to buy a cryptocurrency.
• Wait: You hold your position while monitoring the market for a price increase.
• Sell and return: If the price goes up, you can sell the crypto at a higher price, repay the borrowed euros (plus fees), and keep the difference as your return.

Going short

You go short (Short Selling) when you expect the price of an asset to fall.

• Borrow and sell: You use your euros as margin to temporarily borrow a cryptocurrency and sell it immediately at the current market price.
• Wait: You hold your position while monitoring the market for a price drop.
• Buy back and return: If the price drops, you buy back the same amount of crypto at the lower price, add the borrowing fees owed, and return it to Bitvavo to close your position.
• Keep the difference: The gap between your higher selling price and the lower buying price is your profit (minus trading and borrowing fees).

Understanding leverage

Leverage allows you to multiply the size of your margin position by up to 5x using your initial margin.

When you use leverage, your potential profit increases for every percentage the asset's price moves in your favor. At the same time, your potential losses increase at the exact same rate if the market moves against you. Because leverage magnifies your market exposure, it brings your liquidation price closer to the current market price. This means there is a higher chance your position could be automatically closed to cover losses.

How is your Profit & Loss (P&L) calculated?

Your margin trading result comes from the difference between your entry price and the price at which you close the position, minus fees.

In the Bitvavo app, you will see an Estimated P&L (Net P&L) in euros and as a percentage. This gives you a live view of how your position is performing in real-time. We calculate this by taking the gross profit or loss of the price difference, and then subtracting your incurred trading fees for opening and your accrued borrowing fees.