The difference between an amateur and professional trading operation can often come down to simply making the most of the collateral at their disposal. While the market on macro level continues to obsess over spot price action, trading platforms are moving toward debt/equity structures to improve their exposure. The objective is to speed up every dollar in a digital wallet as much as possible.
One way to achieve this is by maximizing your capital efficiency through margin trading at Kraken, which as recently seen as substantial overall. Instead of uniform leverage across all assets, exchange platforms now operate under a categorized risk model. This enables highly tactical moves that make for far more effective basis trading.
The New Leverage Landscape
Unlike simple spot trades, where the buyer’s purchase power is tied directly to their account balance, margin allows for the amplification of market presence via the use of already held collateral. With new tools such as an Instant Margining System (IMS), managing those positions has become even more sophisticated. There are two crucial numbers to be aware of when considering margin trading:
- Initial margin (IM): The amount of collateral required for a trade to be initiated. FOr many pairs, IM can be as low as 2% for derivatives and 10% for select spot pairs, allowing up to 50x and 10x leverage, respectively.
- Maintenance margin (MM): The safeline for a trader, whereby if the account collateral value falls below this threshold (currently a default 1% of portfolio value) it will automatically be liquidated by the IMS in order to prevent negative equity for both the user and the exchange.
Tactical Moves for the High-Volume Trader
The sophisticated investor does not see leverage as a pure speculation but rather as an opportunity for tactical diversification or hedging. We are already seeing a significant increase in market-neutral strategies, in which traders use margin to hedge macro exposures. This opens up new possibilities to express a bearish volatility sentiment while maintaining a long physical commodity exposure within the same, combined margin account.
The playing field for cross-asset trading has also been level as a trader can now collateralize Bitcoin or Ethereum with various U.S Stocks and ETF with leverage, creating a prime-brokerate level of cross-collateralization previously only available to large institutional players.
Managing The Cost Of Capital
There is a cost to this elevated exposure; understanding the fee structure for any leverage trade is crucial. When a user opens a leveraged position they are essentially borrowing funds from a liquidity pool, and in this sense, fees can be a significant part of trading profit.
Due to demand spikes, the funding rate of any particular trading platform has become an integral component in an ROI calculation for successful traders. A high volume environment can lead to enormous overnight costs, where holding the line in a profitable position for too long can eat away the profit and loss.
Traders Need to Apply 24/7 Risk Control
The increased capacity to trade must also be accompanied by appropriate risk management measures. Realized profit and loss insights, will enable users to see how their positions are actually performing and use automated stop losses to manage their position relative to their Maintenance Margin.