What is Binance Margin Trading? What is the difference with perpetual contracts?
Leveraged trading is a type of margin trading. Margin trading is a trading model that uses small capital to obtain large capital operations. In addition to amplifying returns, it can also improve capital utilization and flexibility.
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The most well-known perpetual contract also belongs to margin trading.
The difference between leveraged trading and perpetual contracts is that leveraged trading is spot leverage in nature. Users can use leveraged trading to purchase spot that exceeds the amount of their own assets, and use it for staking, participating in IEOs, or selling with leverage for hedging or short selling.
Perpetual contracts are futures contracts with no expiration date, which cannot be delivered and can only be traded in the contract market.
In addition, the funding sources, fees and interest of leveraged trading and perpetual contracts are also different. The funding source of leveraged trading usually comes from a third-party lending platform, while the funding source of perpetual contracts is based on the minimum initial margin threshold calculated according to the leverage ratio set by the user.
When the margin becomes zero due to losses, the system will terminate the contract to avoid the situation where excess losses cannot be repaid, which is called a margin call.
As for the handling fee, Binance's leveraged trading fee is the same as spot trading, with both maker and taker orders at 0.1%, while the perpetual contract fee is 0.02% for maker orders and 0.04% for taker orders. In addition, perpetual contracts also have a funding rate mechanism to maintain premium balance.
Therefore, although both leveraged trading and perpetual contracts are margin trading, leveraged trading is actually a loan version of spot trading, while perpetual contracts are more like futures.
How to use Binance Margin Trading?
There are five main steps in Binance margin trading: account selection, transfer, borrowing, trading, and repayment.
Select an account: Binance divides spot wallets into three types: spot wallets, full-margin leverage wallets, and isolated-margin leverage wallets.
The three funds are separated, so before trading, you must first use the transfer or deposit function to allocate funds to the wallet you want to trade.
Transfer: You must have money in your wallet before you can conduct leveraged trading. If you do not have any assets in your entire Binance account, you can deposit money first and then transfer funds.
Borrow: Click Borrow to borrow assets. The maximum amount of borrowable assets is determined by the principal and leverage.
For example, in a full-margin account, the maximum leverage is 3 times, and my principal is 1,000U, then I can borrow up to 3,000U. In addition, isolated margin accounts support up to 10 times leverage.
Trading: Start trading after borrowing assets. The trading interface of margin trading is the same as spot trading.
You can choose to use non-stablecoin assets as collateral in exchange for stablecoins to purchase other assets, or use stablecoins as collateral to borrow non-stablecoin assets to participate in IEOs, pledge, or sell them short.
Repayment: After completing the transaction and taking profits or the activity is over, if there is no other use, it is recommended to repay the loan immediately to avoid incurring additional interest.
How to protect your assets when trading with leverage?
When engaging in leveraged trading, it is often easy to cause excessive losses due to unfamiliarity with the risks of leveraged trading itself. The following may occur:
1. Unfamiliarity with the differences between full-margin accounts and separate-margin accounts leads to excessively large positions, exacerbating the risk of profit and loss.
2. Unfamiliarity with the risk rate and forced liquidation mechanism of leveraged accounts, resulting in excessive losses and failure to stop losses or replenish margin to trigger forced liquidation.
3. After suffering losses, they develop a gambler’s mentality and borrow more and more in an attempt to make up for the losses.
4. After borrowing, the funds were used for a long time without paying attention to Binance’s notifications, which eventually led to the interest triggering the forced liquidation mechanism.
5. The leverage is too large and cannot withstand forced liquidation caused by market fluctuations.
6. The proportion of loaned assets is too high, resulting in the leverage margin being unable to withstand market fluctuations and triggering the liquidation mechanism.
The above points are not difficult to avoid, but you must first understand how to operate leverage trading and understand its details before engaging in leverage trading.
If you are not familiar with an investment tool, do not use it. More importantly, you must overcome human nature to trade rationally. Do not relax or become complacent because of a temporary profit. You must always respect the market.
