By Alex Cavanagh on The CapitalMargin trading within the cryptocurrency market has come from being an often-unused curiosity for many traders, to today being responsible for a majority of daily global crypto trading volume.Margin trading is an essential tool that is used by millions of traders in order to develop strategies which maximize the likelihood of generating profit, open up a wide range of training opportunities that would not normally be present, are the most efficient use of capital when investing in cryptocurrencies, and that can be used to mitigate unnecessary risk.While for some traders margin trading is well understood and used, for a large number of other traders it is still quite an esoteric concept, and this is why we’ve created this guide.In this definitive guide we’re going to cover what cryptocurrency actually is, what margin trading is — including what shorting and leverage both are, where the best places to margin trade cryptocurrencies are, and the best strategies for margin trading cryptocurrencies online in 2020.What is Cryptocurrency?What Makes a Cryptocurrency, a Cryptocurrency?Although it may seem like Bitcoin and other cryptocurrencies are one-of-a-kind, reality couldn’t actually be further from the truth.Bitcoin was not the first digital currency to be created, but instead was the first to be widely successful, where there are many previous attempts either had limited success or complete failure.Although cryptocurrencies are virtual currencies, there are some distinct differences between all previous incarnations of virtual currency and the cryptocurrencies which we are using today.Like all virtual currencies, cryptocurrencies are completely digital, not controlled by any government or bank, and may be used to store and transfer value.However, the main thing which distinguishes Bitcoin and other cryptocurrencies from all other previous digital currencies is its high reliance on decentralisation as a means to democratizing the network, as well as protect it from all outside threats.Many previous virtual currencies were quickly and easily shut down by governments and regulators once they gained any kind of traction or user base.The process of shutting down these currencies was relatively easy, all it took was to locate the server that the currency was stored on, and then to pull the plug or issue legal requirements for the shutdown of the organisation that was managing the currency.Conversely, decentralisation has been built into Bitcoin and all other cryptocurrencies as the core principle behind their success.Regulators and government agencies are unable to shutdown Bitcoin, and this is also true of all other cryptocurrencies.The reason for this is because no single organisation is in control of Bitcoin, and there is no single server or location to raid in order for government agencies to be able to pull the plug.Instead, Bitcoin nodes are spread across the world and used in a majority of the countries of the world simultaneously, which means that Bitcoin and other cryptocurrencies are completely protected from government intervention.The technology that has made this possible is called “blockchain,” with a key way of determining if a virtual currency is actually a cryptocurrency being whether or not it runs on blockchain.What is Blockchain?Blockchain technology was a revolutionary creation introduced to the world by the creator of Bitcoin known as “Satoshi Nakamoto” in 2009, in the same research paper that described Bitcoin for the first time.Blockchains are essentially just computational data structures which are comprised of a list of time-stamped blocks of data, which are connected to each other in a way that it shows that all previous data in the blockchain cannot be tampered with or changed.This means that by saving all transactions that ever happened in previous blocks within the blockchain, and those blocks then becoming immutable, that blockchain provides a highly reliable and accurate system for storing and transferring digitised value.Blockchains use a system known as “proof of work” as a mechanism that ensures consensus between everybody using the network, with the network being comprised of nodes and users.Nodes are parties that have downloaded the blockchain to their computer and are actively participating in maintaining the network. Many nodes engage in proof of work, which is also known colloquially as “mining.”Miners compete against each other to use their computational power to solve complex cryptographic problems, with the winner of each problem being rewarded and amount of the cryptocurrency.When the winner is selected, they are then allowed to decide which transactions will be added to the next block, ensuring that the decision for which transactions can and cannot be added is decentralized and not controlled by any one party.Users are essentially those that buy and sell the cryptocurrency, that being on trading platforms or otherwise.What is Margin Trading?Margin TradingAlthough margin trading is a relatively recent addition to the world of cryptocurrency, it has been in use in traditional trading for many, many years.Margin trading is the process of borrowing funds from a broker in order to create trades that would normally not be possible, and that typically have the potential to yield a higher return on investment than a normal trade.Margin trading has been incorporated into many of the largest cryptocurrency trading platforms in the world today, as well as there being an influx of new trading platforms that specialise in margin training.There is a clear distinction between the two major types of margin trading common with those — being shorting and leverage.ShortingShorting is the process of borrowing funds from a broker to be traded, and then immediately selling that asset with the expectation that its price will drop in the future.In order to yield profit from a shorting trade, the price must drop and the trader must rebuy the same amount of that asset at the lower price.If this occurs then generating profit from the trade is possible, being that the trader then repays the broker the amount that has been borrowed, keeping the difference in the cost of the original purchase price minus the cost of the ultimate repurchase price.In this way traders generate profit from shorting when the price of an asset goes down instead of when the price of an asset goes up, and as can be expected this opens up a wide range of different opportunities for generating profit that are not available to those traders that only try to buy low and sell high.LeverageLeveraging is a type of margin trading that involves borrowing an amount of an asset from a broker, while putting down a small amount of the same asset known as the margin, and then being able to create a trade that is significantly larger than would typically be possible.Leverage is typically displayed as either a multiple of the normal size of the trade (ie. 20X), or as a ratio (ie. 20:1), with the range that is typically available for leveraging being between 2X up to 1000X at the highest end.Leveraging is a way of efficiently using capital within cryptocurrency markets, being that if a trade is successful then using leverage would generate the maximum amount of profit possible in that situation.Leveraging is important to be coupled with effective risk management strategies being that the magnitude of additional profit that can be generated is also equal to the magnitude of loss that can be generated, but by using stop losses and other mechanisms this can be managed effectively.Where are the Best Places to Margin Trade Cryptocurrencies?PrimeXBTPrimeXBT is the largest multi-asset margin trading platform in the world, servicing traders from more than 100 countries, and handling more up to $950 million per day in trade volume.Over the past two years PrimeXBT has grown rapidly, and has built a reputation for providing a wide range of cryptoassets including BTC, ETH, XRP, EOS and LTC, as well as introducing the top traditional assets to their listings last year, including stock indices, forex pairs, commodities and metals from globally markets.PrimeXBT is also one of the leading crypto-centric margin trading platforms in the world, providing industry-leading leverage of up to 100x on all cryptoassets, and up to 1000x on all traditional assets.Traders can access a range of advanced and customizable features, such as the platforms Covesting module which allows for the creation of peer-to-peer investment funds that allow users to share strategies and information, as well as profits.The user interface on the platform is intuitive to use, well-made and full of different tools to enhance the trading experience, PrimeXBT’s trading engine is powerful and can execute up to 12,000 trades per second, with an average trade execution time of less than 7 milliseconds.As well as this, PrimeXBT uses the combined liquidity of a dozen different providers together in order to ensure trades can be created and cleared quickly, avoiding slippage, and increasing profits.PrimeXBT’s customer service won acclaim for being the best of the top 5 cryptocurrency margin trading platforms in a study conducted in 2019, with top scores for categories including response time, politeness and professionality, and the number of channels available for users.Finally, PrimeXBT is the only major trading platform to provide KYC-free trading, meaning that all that is needed to sign up is an email address, and that the registration process takes only 60 seconds.eToroeToro was launched in 2006 in Tel Aviv, Israel, and following multiple successful funding rounds has grown to be one of the largest financial trading platforms in the world, listing 15 of the top cryptocurrencies, along with hundreds of stocks.The platform allows for payments in fiat via online banking and wire transfers, and the platform has a strong trading engine that reliably executes trades in short periods of time.Unlike most other cryptocurrency trading platforms, eToro provides social trading, with eToro’s most differentiated feature is the ability to copy trade, which is a process similar to PrimeXBT’s provision of fund creation for traders.eToro specialises in traditional assets like stocks and forex, but who have recently included a limited number of crypto-assets in their listings when they partnered with Coindash in 2017.One major drawback for traders using eToro is that the platform’s fee schedule is one of the most expensive available online today, and that eToro’s trading tools are well made, there are other options with as-good-or-better quality, but at a fraction of the price.eToro’s charting system is easy on the eye and options are placed logically throughout the interface and because of basic security features like two-factor authentication, the platform has not been hacked to-date.KrakenKraken is one of the oldest crypto exchanges, available in the US, Canada, Japan, and other limited European countries. The trading platform has relatively liquidity which allows for quick funding of trading accounts and high volumes.Kraken offers margin trading with up to 5x leverage and short selling on a range of crypto and fiat assets, but while 5x is better than some exchanges, it would be nice seeing higher leverages at the same level of some other platforms on the list.Kraken is a security-conscious platform that was founded by two of the security analysts that were brought in to assess the Mt. Gox fallout in 2014.Because of this Kraken has tight security, and has never been hacked to date — also claiming to have never been breached in any way.Being one of the older trading platforms in the cryptocurrency market today, this legacy of a focus on security is impressive, and has helped Kraken to build its brand around being a safe place to trade.However, over the years Kraken has experienced some severe issues with the performance of their platform, including periods of weeks at a time where every day their trading engine would collapse under the pressure it was dealing with.It was not uncommon for Kraken users to have their trades frozen for hours while having to wait for Kraken to re-establish its order book, and this heavily damaged the platform’s reputation.Today however, Kraken appears to have largely dealt with this and is in much better shape as a result.What are the Best Cryptocurrency Margin Trading Strategies?Hedging with ShortingRisk management is often one of the most underestimated and largely missed principles for novice traders within the cryptocurrency market.However within professional stock and forex trading, hedging is a key component that insures the long-term profitability of strategies, and the mitigation of unnecessary risk.Hedging can be accomplished in a number of ways, but perhaps the most simplistic way to hedge a trade is to create a counteracting trade that will effectively reduce the amount of risk of the original trade.In the case of a long position being created, there is no way to create a hedged position without being able to short the asset.Because of this, using a platform that allows for the margin trading of crypto assets will provide the opportunity to hedge trades as part of a larger-scale risk management strategy.Leveraged Mean Reversion TradingMean reversion is the principle that if an asset moves away from its historic average price by a significant amount, that there is an increased likelihood that at some point in the future it will return turn to its historic mean.Another way of saying this is that whenever the price of a cryptocurrency is dramatically pushed away from the normal price, there is a high likelihood that traders will take advantage of this short term deviation in order to make profit.Mean reversion is a core strategy used by a wide number of traders, both from the retail market and also institutionally.With the use of effective financial analysis of cryptocurrency markets, reliable strategies can be developed that use mean reversion in order to identify repetitive trading opportunities.When such strategies can be developed, the most efficient way of monopolizing upon them is with the use of leverage to maximize the return on investment.Is Margin Trading Cryptocurrency Risky?Margin trading is sometimes miscategorized as a risky way to trade, when in reality a majority of professional traders and institutional investors use margin trading on a daily basis.What is risky is margin trading without a good understanding of risk management, using poor quality margin trading platforms, and creating positions that are too large for your financial situation.Margin trading is actually the most efficient way to trade cryptocurrency, and it can be used in a range of situations that open up opportunities that would normally not be possible.The best approach to have when considering cryptocurrency margin trading is to first do a lot of research into what margin trading is, as well as the platform that you plan to use.Knowing about the tools and types of orders that can be created on a margin trading platform will allow you to develop robust strategies that use all of the mechanisms available to you.Often a platform will provide advanced margin trading tools, and these can be used to prevent unnecessary risk, and to increase the likelihood of generating profit.In Summary: How to Margin Trade CryptocurrencyToday margin trading is a core part of the cryptocurrency market, unlike originally where only a few platforms even allowed users to margin trade.However the high demand from traders for these services reflect the continuing sophistication of the market in general, with many traders today having a far deeper understanding of trading principles than even just five years ago.As the market matures, the number of platforms providing margin trading has been growing exponentially, as well as the number of major cryptocurrency trading platforms that today are incorporating margin trading into their systems.With this in mind, the use of margin trade is a key skill needed by any serious professional trader in 2020, with this guide hopefully being the start of that learning process for some traders that are just being introduced to margin trading.While there are a large number of platforms available to margin trade cryptocurrency, it is important to be selective about the platforms that you choose.A number of margin trading platforms online provide substandard services and are generally untrustworthy for traders, therefore selecting platforms such as the ones mentioned in our guide is key in order to protect your funds, as well as increasing the likelihood of profitably trading cryptocurrency on margin.The Capitalhttps://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/hrefHow to Margin Trade Cryptocurrency: The Definitive Guide [2020] was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.