Doc's Daily Commentary

Mind Of Mav

Making Crypto Out Of Thin Air

Let’s start by giving a basic definition of the terms involved.

What is short selling?

Shorting is pretty easy to explain.

If I sell a bitcoin, I have ‘cash’ in the form of a stablecoin like USDT or BUSD. When the price drops, the amount of bitcoin I can afford with that cash goes up.

Bitcoin is cheaper, so I can get more for my money.

But what if I told you I didn’t own any bitcoin when I sold one?

What is cross margin?

Cross margin is a trickier concept to define.

I’ll talk exclusively about Binance, just because that’s the exchange I’m familiar with, but a lot of this applies elsewhere.

Binance provides 3x leverage in cross margin, which means that for every $10 of coins you have, the exchange will lend you twice as much. That means you can sell 3 times as much, because you have your principle investment of $10, as well as $20 that the exchange gave you.

Now obviously there is risk involved.

No one would lend you twice as much money we you own if they thought there was no possibility of ever getting it back. By borrowing the maximum possible amount, you take the biggest risk. You are given a liquidation price at which point the exchange will close your position, because you’re clearly not going to be able to return what you borrowed.

The more you borrow, the nearer your liquidation price will be.

If you borrowed a sufficiently small amount, your liquidation price could be $10,000 or more away from the current price.

Is that an unacceptable risk?

Then cross margin is probably not going to be for you.

How do I make money ‘out of thin air’?

In the title I said that this provides you a way to make money ‘out of thin air’, but I’m really just talking about the fact that you don’t sell anything you actually own.

I’m using bitcoin in my example, but it would work for any other coin you’re interested in that supports cross margin on your chosen exchange.

Let’s say I own 1 ETH.

When using cross margin with borrowing enabled, the default behaviour of the trading screen (when selling 100%) is to borrow 2 ETH and market sell it along with my 1 ETH.

But what if my 1 ETH was already in an order? I could choose a number I really want to limit sell ETH at, for instance $4,000. I could choose a really optimistic target, like $10,000. The only thing that matters is that once my 1 ETH is in that limit order, it cannot be sold in any other order. When I market sell 100% now, the trading screen still borrows 2 ETH and sells it.

But, crucially, my 1 ETH stays put until $4,000, $10,000, or whatever other far away number I picked for it.

Now let’s say I have a selection of coins on my cross margin account.

Maybe I have $10 of ETH, BNB, ADA, and XRP.

All of them have been set to limit sell at a high price, essentially confirming their status as longs. The ‘cross’ part of cross margin is all about allowing collateral to be shared between a variety of coins, making them more likely to keep their value on average.

With a variety of alts as cross margin, I am still able to borrow 2x their total value in order to short bitcoin, despite not the fact that I don’t own bitcoin. This would technically be 2x leverage, as your principle would not be affected. But doing things this way allows you to have a higher liquidation price, because you haven’t sold your principle along with the borrowed amount. In this case your principle is really a combination of all your varied margin coins, because you don’t have any bitcoin yet!

If bitcoin was in a downtrend, I would borrow to sell some bitcoin. Remember that the larger the amount you sell, the larger the risk you take and the closer your liquidation price will be. When bitcoin was cheaper, I would use the cash to buy the maximum amount with auto-repay, which repays your debt from borrowing. This would be more than I originally borrowed and sold, because I could get more for my money.

My profit in this case was essentially reinvested into a long. Instead of having cash left over, I had bitcoin leftover.

If bitcoin was in an uptrend, I would buy with auto-borrow, which automatically borrows USDT to buy some bitcoin. This would give me a long, and hopefully I would be able to sell it later at a higher price. Selling 100% with auto-repay enabled leaves you with only USDT at the end, so be careful if you want to actually accumulate bitcoin. When choosing to sell 100% on Binance, you’ll notice that it says ‘repay’ in small text underneath, followed by an amount of bitcoin.

This is the amount that you actually owe the exchange, so it’s possible to set your order to only sell that amount, leaving you with bitcoin leftover.

So that’s how you create money out of thin air with cross margin, without selling any coins that you actually own.

You’re able to sell Bitcoin and buy it back cheaper, all without ever having owned it.

Managing risk

Hopefully you should already understand that trading is safer with a stop loss. This allows you to close your position when the price moves too far in the opposite direction, and it’s up to you to define what ‘too far’ means to you. Many traders choose a risk/reward ratio of 3 to 1, meaning their potential profits are 3 times greater than their risk. If your stop loss is at 1% loss, it makes sense that you would wait until you make 3% profit before closing your position.

What next?

The opposite of cross margin on Binance is 10x Isolated, which restricts you to one coin pair, like BTC-USDT. If you’re able to create some bitcoin ‘from thin air’ in cross margin, you’re also able to transfer this bitcoin there. Isolated pairs offer higher leverage, without the risk of losing all of your coins if you reach your liquidation price. Since your bitcoin was essentially created from nothing, you can now take a high level of risk with it.

What would you lose if you were liquidated?

Bitcoin you never bought with cash, all without selling any of your coins.

If you lose it, you can always make more!

 
 
 
 
 

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