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Introducing Digital Assets Margin Trading in India
On 31st March 2018, we mentioned about interest rates on holding digital assets. That was a fairly simplistic way of putting it across. Today we'll explsain this in detail. We are offering interest rates on digital assets by connecting lenders with potential borrowers. This is called margin funding, and trading with borrowed assets is called margin trading. Let's try and understand.
Update: Margin trading is live on 13 digital assets now: BTC, ADA, ETN, ETH, Gas, LTC, NEO, Ncash, RPX, XRP, Sia, XLM, TRX
What exactly is margin?
Margin in its simplest form is a loan. As of now, you can trade with whatever amount you have in your Bitbns wallet. So, if you have 100 XRP, you can trade with 100 XRP only.
What if you have a strong understanding that the market might move in a particular direction, and you want to invest more than what you have? This is where margin comes into play. Here, a set of lenders can lend you a certain amount, and with that you can invest more than what you have. The lenders earn interest, the borrowers get to place larger orders. Overall a win-win.
Why is margin needed?
Margin trading works because of a concept known as ‘leverage.' To understand how leverage works, let's take an example of a home loan.
Case 1: By taking a home loan
You buy a house worth: 50 lakhs
Using a home loan: 40 lakhs
Down Payment: 10 lakhs
Interest rate: 10% per year
Now, at the end of the first year, you will have to pay 10% of your loan or 4 lakhs to your lender. Let's say that the value of your house has increased by 20% or by 60 lakhs.
You sell the home for: 60 lakhs
You return the loan with interest: 44 lakhs
Your total Profit: 6 lakhs. [Selling value — ( Loan + Interest + Downpayment)]
Case 2: No home loan
Now let's say you bought a house with only the money you have in hand, without taking any loans. Again, let's say the house value rises by 20% at the end of the year.
You buy a home worth: 10 lakhs
After 1 year, you sell it for: 12 lakhs
Your total profit: 2 lakhs
Notice how you made more money in the first case because you started with a larger initial amount. By leveraging, you have increased the profit by a factor of three.
Also note that if the value of the house had decreased by 20%, you will face a huge loss of 14 lakhs if you had taken a loan. And your loss would be relatively smaller amount of 2 lakhs without the loan. This is the reason why leveraging can be risky and should be done by traders with caution. Whether margin trading works to your benefit depends on how the market performs and how you trade.
On the other hand, the lender gains an interest of 4 lakhs regardless of the market. Lending money is considerably safer. The profit, however, is smaller in this case (compared to a 6 lakh profit.)
Let's take an example w.r.t. crypto:
Imagine you have 100 XRP. And you want another 100 XRP. You can get that with the margin facility. Now the question is:
Why would I borrow funds as a trader?
Think you have 100 XRP you bought at INR 50 and sold at INR 55.
The profit you made was INR 500. But imagine if you could sell 200 XRP even though you only hold 100 XRP with you. The profit in that case would be 200*5 which is INR 1000.
Now you have just doubled your profit by using margin.
So margin essentially gives you a way to multiply your earnings. It can also lead to multiplying your losses. Let's understand how margin works out if markets go up or down. An efficient trader can use margin in both the markets.
How would it work for the trader when the markets go down?
You had 100 XRP. You have borrowed 100 XRP with, say a interest of 5 XRP, to be paid by the end of borrowing period.
You believe that the market is about to go down. You will sell them off immediately.
When you think the XRP price has reached a low, you will buy back the XRP to return to the system again. In the end, you will be left with more INR compared to normal trading.
For a margin borrower, this is how it would look like.
So you could make your profit 1.8 times of what it would have been by using margin here.
How would it work when the markets go up ?
Scenario: User takes margin from the system for 'n' days and she has an idea market is going to stay up for few days. She keeps on holding it till the time it is increasing. At nth day, she realizes, market is going to go down now and she sells the borrowed XRP. That's how a normal trader will do. Now she waits for the time XRP starts growing again and purchases at the minima as per his calculations .
Let t1 be the borrowing time and market grows till t2, and then finally falls till t3.
For a margin borrower this is how it would look like.
So you could make your profit 1.7 times of what it would have been by using margin here.
How does this work?
There are lenders who are willing to lend their XRP at a specified rate. The rate specified currently is 0.055 %. The lenders define the amount of XRP, the duration of lending, and place margin lend orders.
There are borrowers who are willing to borrow XRP at a specified rate. They specify the duration of the borrowing and the amount of XRP they need. They place a margin borrow order. Currently the rate is fixed at 0.055%(20%/365 — the 20% that we mentioned in the earlier article) based on research on user's preferences and for simplicity. The system matches the margin lend orders with the margin borrow orders. Once the margin lend order finds a corresponding Margin borrow order, the order is executed.
The margin order matching would be done once a day. So on April 3rd at 12 noon. all borrowers who have placed a borrow order and found a matching lender order and similarly all lenders who had placed a lend order and found matching buy order can see the status on their account section.
Currently, you can borrow equivalent amount of crypto only. So if you have 100 XRP you can margin borrow 100 XRP more. The borrowing X for an X holding in your account is called leverage. Leverage is just a financial term which means for X amount that you hold you can have 1:1 additional borrowing. That means you can have 1x leverage.
Imagine if we provided a facility where there was 2 times the lending of what you hold it would have been a 2x leverage. Currently @ Bitbns, we allow 1x leverage.
Which digital assets can I borrow on margin?
Currently you can borrow 13 digital assets on margin. Namely BTC, ADA, ETN, ETH, Gas, LTC, NEO, Ncash, RPX, XRP, Sia, XLM, TRX. We might introduce more digital assets and users would be notified about the same.
As a borrower, what all limits do I need to be aware of?
Borrowers get in margin loan after some corresponding lender order is found.
We compute the net worth of the borrowed and collateral holdings.
So, if you have 100 XRP as balance and you have borrowed 100 XRP based on it and your loan liability was, say, 5 XRP for a certain time duration.
PS: We have not considered any trade fee for the above examples. Because this example account had referred enough friends to join bitbns. ;)
As a margin borrower, can I withdraw my assets?
Yes. You can withdraw your assets. You need to be careful, though. Post withdrawing, you are not getting close to the freezing zone. Imagine you hold assets worth Y. And you have borrowed X worth of assets. You can withdraw Y — 2X.
What's interesting and new for the trader?
The interesting bit is the user does not need to be constrained to the market she bought the funds for. So user can take XRP and sell them, and buy XLM if she feels XLM is going to grow fast. The user can then liquidate and sell off XLM at a profit and buy back XRP and return the borrowed amount. This is probably the first time globally that a sort of cross- pollination is being allowed. We see that this opens up additional degrees of freedom for trading and empowers the trader to make the best of all opportunities available.
So borrow XRP and if you see there is larger fluctuation in neo. Then sell XRP and trade in the neo market with a larger leverage.
If you see there is larger leverage in the XLM market then you can go to XLM market.
This as mentioned probably is the first time globally this is being done.
What is the benefit for the lender?
If you are not a daily trader and want to hold digital assets for a long time, then you can increase your asset base by lending the crypto to potential borrowers. Your funds remain safe and we have explained this further in FAQ section. You may start with a small lending and gradually increase.
What are the risks associated with offering margin lending ?
The way the system is designed the underlying risks for lenders are fairly low. You can be assured that your lent assets will be returned. If your matching borrower is facing a loss, this is how you'll still get the lent asset.
If a trader is at a loss,he has an option to deposit more money and recover his position
When the value of the trader's account falls below in a minimum maintenance threshold, all his order positions are force-liquidated and funds will be recovered
Can I borrow and lend at the same time?
Right now you can only do one thing for a specified duration. So if you borrow, you can't lend for that much duration.
When do I receive my payments?
You receive the interest at the end of lending period along with the amount of digital asset given. You may track the daily interest that you are getting here.
When can I terminate my lending?
You can't terminate your lending before the contract period. The current lending periods defined are 1, 3, 7, 15 and 30 days.
Can I return the funds before my stipulated duration of borrowing?
Yes, you can return the funds before the stipulated duration. But the amount borrowed and ensuing interest would be payable in full, which was mentioned at the time of borrowing.
Example: Now what case would you want to return the borrowed amount beforehand.
Think of it this way. Imagine you have borrowed 100 XRP and the price of XRP was say INR 45. Now consider the markets went upwards and you sold them off at INR 50 and you made a profit. Now, in this case you might want to return the entire borrowed amount back. Because you have already booked your profits and might not want to invest further if there is uncertainty in the market.
Would the rate always remain fixed ?
Currently the rate has been fixed at 0.055%. This is based on research and also adds simplicity to first time lenders and borrowers. Going forward, this would be traded like a dynamic buy and sell order book. It would be a margin borrow and lend order book and users would place orders also specifying the rates at which they want to lend it. Currently lending and borrowing and margin is free and there is no charge levied.
Checkout our video on Margin Trading
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