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Working with Crypto Margins – A new frontier for Cryptocurrency Traders

April 16, 2021 11:41 am
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Working with Crypto Margins – A new frontier for Cryptocurrency Traders

When risk-averse equity traders look for risk mitigation strategies, margin trading is likely front and center on their minds. Using margins allows traders to limit the risk they take with their own capital. Sure, if the trader’s call goes bad, and he/she is over-leveraged, things may get ugly. But carefully executed margin transactions are a win-win for everyone. The broker/lender extending the leverage, as well as the trader executing the trade, make money.

For Cryptocurrency traders, however, there aren’t many options to trade on margin. As a result, digital asset trades are far riskier than their equity counterparts. But that’s about to change!

The Perils of Crypto Trading

Imagine you were to establish a short position in a stock – and the price skyrocketed. You’d probably scramble to cover your position quickly, eating as much of the loss as you’re exposed to. We saw that scenario play out in the GameStop short-selling debacle that took place in late January/early February. Your goal would be to close the position ASAP, before you turn into yet another victim of a short squeeze. Well, when it comes to trading Cryptos, high volatility magnifies the issue multi-fold – and there lies the peril!

Imagine you had shorted Dogecoin (DOGE), a peer-to-peer, open-source digital currency that’s been around since late 2013. Around the same time when GameStop short squeeze took place, Tesla (TSLA) founder Elon Musk tweeted his belief that DOGE is likely to be “future currency of Earth.” That was it! Within a matter of roughly 24-hours, the currency’s value shot up by 420.29%. Over a 1-month period, DOGE is up over 700%!

But it doesn’t end there. Tesla founders’ subsequent tweets, about his $1.5b Bitcoin purchase, sent the value of the popular Cryptocurrency skyrocketing. Opening the trading day at slightly above $39,700, BTC was up to just past $43,000 towards the close of the trading day when the tweet was made. That’s a 230-percent plus spike over a 6-month period and going as far as $57,400 today with the $60,000.00 milestone in its sights.

Now, imagine you, as a short-seller using a regular trading account, trying to cover your positions in either of those Cryptocurrencies. It would be a massacre of epic proportions. Clearly, Crypto traders need a solution where they can use leverage to support their trades, and not risk as much of their own capital. The name of that game is Crypto Margin trading.

As a margin trader, you multiply the power of your trades without exposing your personal fortunes. In the equities trading world, brokers offer you margin accounts. The same concept exists in centralized crypto exchanges. But with crypto-based decentralized finance, there was no concept of margin trading, which made crypto trades that much riskier. The only way to de-risk trading in a decentralized finance environment is through margin trading using leverage. And there’s been a void on that front – until now.

The Solution: DeFi Crypto Margin Trading

Thanks to a new digital DeFi protocol, called UniMex, traders can now trade using leverage (akin to equity-based margin trading accounts) on Uniswap, the crypto world’s largest decentralized exchange (DEX). Because most decentralized crypto exchanges lack a mechanism to go short or long on digital tokens, the UniMex platform offers a solution around that challenge. It does this by providing an innovative way for traders to use margin trading strategies with native Uniswap tokens.

At a very macro level, margin traders must first stake ETH-denominated tokens in a central margin account. Once they meet that prerequisite, traders may borrow ETH and ERC20 tokens to establish their long/short positions. One caveat: Trading ERC20-ERC20 tokens isn’t an option currently offered by the UniMex protocol. Since the platform lends Ethereum (ETH) to margin traders to establish leveraged long positions, it restricts trading only to ERC20-ETH Uniswap pairs.

A series of smart contracts, that allow (long position holders/lenders) token owners to create a lending pool of Ethereum-based tokens, underpins this solution. This ecosystem offers a win-win solution for lenders and borrowers. Using this pool of digital assets as leverage, margin traders (borrowers) then extend the size of their own trades by x-fold (2:1 leverage, for instance, would enable a trader to trade twice the amount of value held in his/her margin account). Margin traders pay a fee to the platform, 0.4% of which goes to the lenders as their reward for creating liquidity pools to the trading system.

Unimex is also regularly updating its network, and only days ago, it published its v1.2. The new version, originally released on Uniswap on March 8th, brought additional features and order types, including stop-loss, limit orders, take profit, and even commitment adding. Other than that, it also had some UI updates that are meant to make the experience and navigation smoother.

The same features reached PancakeSwap on March 10th, although with slightly different fee distributions.

The project also announced that further updates will arrive in a week or two following this release. These will include stablecoin deposits and withdrawals for USDC, DAI, USDT, and more, as well as stablecoin trading pairs, plus an increase of max leverage of up to 10x.

A Better Deal for Crypto Margin Traders

Some might argue that the caveat, of restricting trading to ERC20-ETH Uniswap pairs, erodes some of the shine off a truly DeFi margin trading model. However, on the plus side, because these are low liquidity pools, these restrictions are reasonable as a barrier against “engineered volatility” as seen on other platforms. Net-net, the UniMex margin trading solution makes sound sense to serious crypto margin traders.

Another unique feature, which crypto margin traders will appreciate, is that the UniMex trading engine is self-contained within Uniswap, with trades entirely executed on-chain. So, what does this mean to traders? It provides greater decentralization of trading than the current popular hashed trading system. The current approach exposes traders to more uncertainty in order execution than UniMex’s on-chain direct-to-exchange trade settlements.

 

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Cryptocurrency Markets

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