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Margin trading using dYdX Exchange.
Increase your exposure to Ethereum up to 4 times.
DISCLOSURE: This is not investment advice. Please do your own research before investing. I am not affiliated, compensated or in any way associated with featured applications in my posts.
“Buying the dip?”
In our last post we discussed earning passive income by supplying liquidity with Compound. This post is about margin trading which is the opposite of passive as it involves a lot of risk, especially given crypto market volatility. Make sure you do additional research before making any investments.
So what does margin trading mean exactly? Say you deposited $200 into Coinbase and bought 1 ETH. Now you can use this 1 ETH to initiate a 4x long margin trade on dYdX, giving you exposure to 4 ETH instead of 1. Of course this comes at the expense of interest owed on a 3 ETH loan based on how long your trade lasts and at the risk of getting liquidated in case the price drops to a set liquidation price.
For example, say you have 1 ETH with current price of ETH @$200 and you want to initiate a 4x long margin trade (buy $800 worth of ETH). If you do this your liquidation price will be around $170 - which means that if the price drops to $170 your 1 ETH collateral will be automatically sold at market price ($170) to cover the losses from your liquidated margin position (4 X -30 = -$120) PLUS a 5% liquidation fee, leaving you with less than $50 (1 ETH sold @ $170 - $120 loss - 5% liquidation fee).
Alternatively, if the price goes to $230 you will gain ~$120 (minus interest) which is a 60% gain on your $200 investment as opposed to $30 (or 15%) if you simply held 1 ETH on Coinbase.
dYdX Exchange walk-through tutorial:
Deposit ETH or DAI into your Metamask wallet (view previous tutorial to learn how to set up Metamask).
To use dYdX Exchange you do not need to sign up for an account or wait for your deposits, simply visit https://trade.dydx.exchange/ and connect with your Metamask wallet.
From the left, select LONG and choose your leverage amount (keep in mind the higher your leverage, the higher your liquidation price). You will see your liquidation price change as you switch between 1.5X / 2X / 3X / 4X.
Enter the amount of ETH you wish to buy on leverage. If you click MAX under ‘Amount’ the system will calculate your maximum available purchase amount, given your leverage. For example, if you have 1 ETH in your Metamask wallet, select 3X Leverage and click MAX, the system will fill in 3 ETH under ‘Amount’.
Click ‘Place Order’ and within a few seconds a Metamask notification should appear to approve your trade. Click ‘Confirm’ and wait for your trade to clear as a transaction on the Ethereum blockchain. You can even watch it get executed on Etherscan. As mentioned, you do not need to sign up or go through any verifications in order to start trading on dYdX because all operations, including custody of your assets, are handled by Ethereum. dYdX is essentially a system of smart contracts built on top of Ethereum with a UI to help end users like us interact with these smart contracts.