One major duality of Bitcoin trading is how rapidly people can profit - or lose value on - their BTC holdings depending on what strategic trading methodologies they use when buying, selling or holding the popular Cryptocurrency.
We recently had the opportunity to chat with Jeremy Glaros, CEO of Coinarch, on the topic of using leverage to maximize investors BTC profit potential, even when the overall Bitcoin price is trading at a low.
Bitcoin prices are known to fluctuate. How can an average BTC investor protect their capital in changing markets?
Controlling your downside risk is a key element of any sensible trading strategy. The fact that the bitcoin ecosystem is still in its infancy means there are relatively few options available to traders to help on this front, but there are ways. By using the Coinarch Booster, for example, a trader can build a position in a desired number of bitcoins but put only a small fraction of this into the investment and limit their risk ONLY to this investment amount.
For example, let’s imagine you have $10,000 to invest in bitcoin because you believe the price of bitcoin will rise. Using the Coinarch Long Booster, you can gain exposure to $10,000 worth of bitcoin by outlaying as little as $1,250 (using 8x leverage). If your view that the bitcoin price will increase in value proves incorrect and it in fact, say, halves, then your losses are strictly limited to your $1,250 investment amount - this is the most you can ever lose.
Had you outlayed $10,000 for a direct bitcoin investment, on the other hand, you would have lost 50% of the value of the position, or $5,000, when the market halved. This direct investment strategy makes risk control much more difficult.
Some people might not be familiar with the concept of BTC trading using margin lending and leverage. Can you explain how this works?
Margin and leverage is a strategy where you borrow to invest. In this way, you magnify your profits if the price of the asset you are investing in (in this case bitcoin) moves in your favour.
Assume, for example, that you invest $1,000 in bitcoin using 3x leverage. This would give you a bitcoin exposure (i.e. an effective bitcoin position) of $3,000, equal to your $1,000 investment amount multiplied by the 3x leverage. You are able to get this by borrowing the additional $2,000 from the margin provider and using this to invest in bitcoin.
If the price of bitcoin increases by, say, 20%, your bitcoin investment becomes worth $3,600 (i.e. $3,000 x (100% + 20%)). If you choose to close out your position at this point, you would sell your bitcoins for $3,600 and repay the $2,000 loan leaving you with $1,600 (NB this ignores the interest payable on the borrowed amount which will reduce your overall profits). This means that you have made a profit on your original $1,000 of $600, or 60%, despite the bitcoin market only having moved up by 20%. This extra profit is the result of your leverage which has magnified your upside by a factor equal to the leverage applied to your position.
You can also use leverage to profit from falls in the bitcoin price by taking what is called a short position. In the case of a short, you borrow bitcoins rather than cash, sell these upfront and then buy them back later to return to the lender. If the price at which you buy the bitcoins back is lower than the price at which you originally sell them, you make a profit on your position.
What are the benefits of using leverage and margin lending as it pertains to Bitcoin trading?
The key benefits of using leverage are the ability to magnify your profits and, in the case of products like the Coinarch Boosters, the ability to control your downside risk (NB not all margin trading products have this feature as many require a margin call to be made, meaning you may have extra money deducted from your account to cover losses and therefore not have a fixed level of downside risk). These features are precisely why leverage is such a commonly used strategy in the investment world, for everything from stocks to property to FX to commodities.
Why apply leverage to bitcoin trading over other types of assets?
The key property of bitcoin that makes it so attractive for trading is its volatility. The historic volatility of the bitcoin price is far higher than most other asset classes, having peaked at over 200% earlier this year which dwarfs typical FX volatilities of around 10% and equity market volatilities of around 20%. In essence, this means the bitcoin price moves up and down very quickly, offering huge potential for profits if you apply sensible controls to your trading strategies.
In a nutshell, Coinarch offers a service that’s comparable to leverage services that are available in mainstream trading platforms for major stock exchanges, only using Bitcoin.
As always, keep in mind that any investment can be risky, so never speculate more funds than you can afford to lose.
We would like to ‘thank’ Jeremy of Coinarch.com for taking the time to discuss this aspect of investing and trading Bitcoin.