What are the implications of the launch of margin trading on Binance?

06 Jun, 2019
by Alberto Arnaldo
What are the implications of the launch of margin trading on Binance?

The thrill is on: margin trading is coming to Binance, and traders and industry players alike are thriving with expectation, questions and, of course, some criticism as well. Currently available in beta mode for verified users only, plenty of crypto enthusiasts might be wondering as to when will it roll out completely, what will be the leverage ratios allowed, and what might be the consequences for BNB prices. 

The works of the novelty: a counterbalance to the $40 million hack?

The first news regarding the implementation of margin trading on Binance came from the hand of Changpeng Zhao himself. The CEO of the first exchange by traded volume mentioned it briefly when he was responding to an AMA in early May of 2019, triggered by the theft of $40 million in funds out of his platform.

The rollback of the Bitcoin blockchain then suggested by Zhao took most of the attention of the crowds. With this rather out-of-the-box idea (which some might label as megalomaniac as well) being discarded only a few hours after its formulation, the hint towards margin trading proved itself as the most relevant news from the AMA, under the light of current events. 

What is margin trading?

Margin trading involves using leverage, which can also be called a multiplier for the sake of simplicity, in order to trade with more funds than those held by traders in their wallets. Needless to say, those extra funds come from somewhere, in this case Binance itself. It should also be noted that users willing to engage in margin trading will almost certainly have to pay fees for using the service, unless promotional discounts are applied, which in any case would be temporary as otherwise the supplier of leverage would be incurring into losses. 

The increase in risk granted by margin trading means that there will be opportunities for incrementing gains exponentially, but also for quickly losing the complete traded amount in case of large “multipliers”, especially if stop-loss options are not properly set.

Therefore, margin trading goes one step further to what most traders are used to manage and it should always be approached with the outmost care.

When will Binance open margin trading and what could be the consequences? 

In the last days, there have been hints at the possible full roll out of margin trading on Binance during July. A tweet commenting the price progression of the Binance Coin, BNB, in the light of the several Initial Exchange Offerings (IEO´s) which Binance has set forward this year, was retweeted by CZ. Interestingly, it includes a label aiming at the possibility of margin trading opening up during the first half of July:

Given that the main utility of BNB is to pay for the trading fees of the exchange, it is to be expected that its price will increase following the official announcement of the enabling of margin trading. Actually, the mere announcement of margin trading, which came hidden under the question on whether users prefer to trade under the dark or the light modes, triggered a price increase which led BNB to its all-time-high valuation.

However, some important questions remain unanswered: what will be the fees for margin trading? Will they be payable in BNB as well, and if so, will a discount apply to traders which opt for Binance´s currency? What trading pairs will be allowed? And perhaps, most importantly, what will be the leverage ratios offered by CZ´s exchange?

This last question will most likely determine the chances of Binance to become the exchange-to-go for margin trading, and a post in Binance Academy might serve as a hint towards the answer, given that they mention ratios ranging from 2:1 to 100:1 as typical for cryptocurrency margin trading. However, during the currently ongoing beta phase, it appears as if only 2x trading is allowed.

BitMEX: the pioneer in the field of margin trading will have to compete with Binance… and Coinbase too

Up until very recently, BitMEX was the only platform of a certain relevance to allow for margin trading, which had traditionally been a signature feature of the Arthur Hayes-led exchange. However, with the irruption of Binance, it seems as if more big players of the industry are lining up in order to add the service to their UI´s.

As Chepicap reported recently, Coinbase has the inclusion of margin trading within their plans. Emile Choi, VP of Business, Data & International for Coinbase, stated that they wanted to provide their users with the opportunity to use leverage for their trades, although with limitations: she assured that the “multiplier” available would not be more than 5x, in order not to “offer a casino to our users”. However, with Binance restricting trading in countries such as Iran, North Korea, Syria, Cuba and the United States, it seems as if BitMEX and Coinbase will have room for deploying their business without competing directly with the CZ-led exchange.

Given that the main leaders of the exchange industry are visibly opening up to margin trading, it seems as it will only be a matter of time before most platforms roll out similar options for leveraged trading.

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