Such a good explanation, Bitwhale. I had exactly the same doubt and want to answer you one little things more.
As you are borrowing these 2 BTC, if you don´t do this margin sell with some leverage even the price of BTC goes down, you dont win anything, is this correct..?
When you say, you borrow 2 BTC, is something you do in the "Exchange" wallet takin these 2 BTC to a lender with a rate fee that he puts or 2 BTC borrow to you the broker..?
The same question I have for buying BTC/USD. If I fund the account in USD and I don´t have any bitcoin, If I want to buy the BTC/USD, have to borrow BTC too. In this case, the return you receive if you win is in USD.
Sorry for the silly question, but In Forex markets I don´t have to borrow anything for trading different currencies and this have me so confused. Thanks in advance.
Hey dude I'm very sorry I'm late on this response, It completely slipped my mind to check btc forums for the last week.
Ok, sorry that might've been a bit confusing the way I explained it.
First let's dicuss a currency pair. A currency pair is two currencies traded against eachother. You will see this in forex as well, such as EUR/USD or GBP/USD. What this means is it is the first currency priced in the second "base" currency.
This idea is to trade one countries currency that you think will do better than another countries currency.
The best way I can explain this is: Back when the US put sanctions on Russia, it was much more profitable to trade BTC/RUR instead of BTC/USD. You didn't have to have Russian Rubles to make this trade though, you were merely trading one countries currency against anothers, your broker will worry about actually funding the trade properly for you.
Example 1: Bitcoin/USD
For 1 bitcoin right now, it costs *blank* united states dollars
Example 2: Bitcoin/GBP
for 1 bitcoin right now, it costs *blank* great brittish pounds
For most brokers, it doesn't matter what you funded your account with (btc, usd, gbp), you can trade any pair you want, you'd just be trading gbp/btc instead of usd/btc which might mean different rising or different returns. At the end of the day though, the trade will be settled in USD, or what ever else your account was funded with.
As for the borrowing: When you are on margin trading, it will all be automatic.
Say for instance you want to short 1 btc @ 2 leverage, you would place a trade for 2 btc margin sell. When you do this, the exchange automatically pairs you with a lender who you then pay interest to. At any point you/the lender can trade their bitcoin off, there's no time limit to it, if say your lender traded off your btc while you are still in a trade, they will just exchange your borrowed btc loan to some other lender.
Once you are ready to close the trade, you trade 2 btc "margin buy" which canceled out the 2 btc margin sell you made earlier and closes out your trade.
All you gotta do to margin trade is fund your account and always make sure to leave enough funds in there to cover any dips in price you might deal with. The best way to explain this is:
Say you have a $1000 account and you are using (for ease of math) 1/10 leverage. This means for every $1 in your account, you are allowed to trade with $10.
Now for example, say you place a trade for a coin worth $5 and put 50% of your account into a that single coin @ 10 leverage, this will leave you with 50% invested in one coin & 50% sitting in your account in cash.
50% of $1000 = $500.
$500 * 10 leverage = $5000
%5000 / $5 per coin = $1000 coins.
You bought 1000 coins for $5000 dollars and you only put up $500 up front. Now let's do some more math.
Let's say tomorrow, the stock goes down 10% to $4.50, a $0.50 decrease:
$4.50 x 1000 coins = $4500
$4500 - $5000 = -$500
So, all your coin had to do was drop $0.50 cents (10%) and you have lost 50% of your account value and now you have no money left in your account other than the $500 you put up to borrow the $5000 worth of coins for the trade.
At this point, you will be what is called "margin called", this is when your broker protects the person who lent you the coins by closing your trade and returning the borrowed coins to the lender. This forces you to close your trade at +50% loss (most the time it's much worse because it's a force sale during a market panic, possibly even a short/long squeeze). This is the only way they can lend you money to trade with, they ensure that only you lose money at the end of the day while protecting the lender bankroll at all costs (and even that doesn't work sometimes, aka flash crashes)
This is why it's very important to never trade more than 10% of your account in a single trade with leverage, it's just asking for trouble. With Forex, I trade 1:50 leverage & only risk 1.5% of my account at a time. This way as my account balance rises & falls, my trade amounts rise & fall with it, ensuring that I'm never too exposed to a single trade.
Please feel free to let me know what else I can explain, I am terribly sorry it took me so long to get back to you. Hope you are well!