Bitcoin Contracts, Leverage & Margin, Spread, Bid & Ask Price

Lots & Contracts

Bitcoin Crypto Currency is traded using standard contracts also known as lots. One standard contract or standard lot of Bitcoin is made of 1 unit of Bitcoin - 1 Bitcoin.

The Bitcoin contract is the size of the amount of Bitcoin Cryptos that are to be bought or sold in the online Bitcoin trading market by a Bitcoin Trader. The standard Bitcoin lot which is equal to 1 unit of bitcoin multiplied by the current price of Bitcoin is not transacted physically, but this 1 unit of Bitcoin is represented by a contract.

These 2 terms, one standard lot and one standard contract can be used inter-changeably because both of these refer to the same thing.

Why Trade Units of Bitcoins

The reason why 1 bitcoin contract is used to trade Bitcoin or BTCUSD is so as to make it easy for traders to transact Bitcoins between themselves online, since 1 contract represents one bitcoin, traders wanting to sell or buy can quickly place and open their trades and have the value of profits and losses made quickly settled using these contracts.

Bitcoin price movements are measured in points. For instance, a $1 price movement in Bitcoin equates to 1000 points. Bitcoin is quoted to three decimal places: if its price is $5530, it will display as 5530.000 within trading platforms.

One point on a Bitcoin unit equals 0.1 cents. Price changes use tiny moves. Bitcoin, or BTCUSD crypto, quotes like $5530.000.

The last digit is the point - the third decimal point.

Now, to answer why Bitcoin is traded in contracts, we shall use the example set-out below to explain:

The BTCUSD cryptocurrency will only move an average of just about $100 dollars per day, this is equivalent to 100,000 points, if one point is equal to 0.1 cents, then trading a single unit of will only give profit of 100,000 points multiplied by 1 cent which is equal $100 dollars profit.

Bitcoin Contract

According to the current Bitcoin chart price at the time of writing, means 1 contract of Bitcoin is equivalent to 1*$5530.000 = $5530.000.

This means to buy 1 lot of Bitcoin at the current price a trader needs to have $5530.000 dollars in their Bitcoin account. But how does a retail trader who does not have a lot of money to invest get such an amount of money?

But How Can any Trader afford $5,530.000 to Invest With?

That is a very good question: the answer is LEVERAGE and MARGIN

In Online Bitcoin trading, you do not need $5,530.000 Dollars to trade BTC/USD Crypto, with leverage & margin you only need $1,106 dollars to transact and trade a contract of Bitcoin, but how?

We shall explain using the example shown below:

Leverage & Margin Bitcoin Trading

Let's talk leverage in Bitcoin trading. With just a small deposit, you get to control a much larger position. That's leverage in action. It lets BTCUSD traders chase bigger profits while keeping risk in check - you're only putting a fraction of your own cash on the line. So, say you deposit $1,106. With 5:1 leverage, you can actually control $5 for every dollar in your account. Basically, you're trading with five times your money.

Therefore, a trader who only has $1,106 in their account can borrow up to 5 times their capital, therefore after borrowing, which is after using leverage the trader will now have $1,106 multiplied by 5 which is equal to $5,530.000 dollars. Now with the trader controlling $5,530.000 dollars they then can be able to trade the 1 lot of Bitcoin.

Leverage is represented in the form of a ratio, e.g. 5:1 means that an online Bitcoin trading broker will give a trader $5 dollars for every $1 that the online trader has - that is the broker will give the trader the option to borrow 5 times the amount that they deposit. Leverage option of 5:1 also means the broker will give the trader an option to borrow 5 times the amount that they deposit in their account.

Margin - Margin is the amount of money required by your Bitcoin broker so that to allow you to continue trading with the leveraged amount. Margin is also the amount which you deposit when opening your account. For example when you deposit $2,000 then your margin is $2,000 dollars.

With leverage it is possible for retail Bitcoin traders or retail Bitcoin traders to trade the online Bitcoin market. Leverage option of 5:1 means that for every $1 dollar in your account you can borrow $5, this borrowed $5 dollars will be given to you by your online Bitcoin broker.

What this also means is that the broker also requires you to maintain $1 dollar in your account for every $5 that they've provided you with.

Bitcoin Contract Trade ExampleIf you deposit $5,000 in your trading account and your Bitcoin trading broker gives you leverage of 5:1 then it means you now have $5,000*5 = $25,000 dollars that you can transact with and even buy up to 4 Bitcoin contracts.

Because the total amount that you now control is $25,000 and your money is $5,000 which is equal to 20% of the overall total, it means your account margin requirement is 20%.

A Bitcoin broker can tell you that their margin requirement is 20% which means that their leverage is 5:1, - 5:1 is the standard leverage option for Bitcoin trading provided by Bitcoin brokers.

Therefore, with leverage & margin as explained above it means that retail Bitcoin traders are not required to deposit all the cash for the whole contract that they are going to be trading with. The account they open they can trade on leverage and this account is known as a margin trading account - meaning they're trading on margin - the funds in their account is the margin for the leverage they will be using for trading.

Spreads

The spread is the difference between the price at which you buy & the price at which the online broker is offering to sell.

Spread can also be defined as the difference between the Bid Price and the Ask Price, the Bid Ask price illustrated below can be used in calculating the spreads for trading Bitcoin, BTCUSD cryptocurrency.

Bitcoin Contracts, Leverage & Margin, Spread, Bid and Ask Price - Leverage Calculator Bitcoin

Bitcoin Trading Spreads in the MT5 Platform

Example illustration of How to Calculate Bitcoin Spreads

The Bid ASK Price of Bitcoin is 5591.990/5577.980

The spread is 5591.990 - 5577.980 = 14010

Spread is equivalent to $14.01

This spread is the profit that the Bitcoin broker makes.

Bid/Ask Price

Bid is the price at which you sell

Ask is the market price at which you buy

If the quote for BTCUSD is 5591.990/5577.980

Bid/Ask = 5591.990/5577.980

Therefore:Bid Price = 5591.990Ask Price = 5577.980

Mini Lots

As a note, there is also the fraction of 1 Lot in Bitcoin trading (1 lot is 1 contract), these fractions of the standard lot are provided by Bitcoin brokers so that to make Bitcoin more affordable to traders with minimum capital required being as little as $110.60 dollars to trade 1 mini lot - 1 mini contract.

The Fraction of a standard Bitcoin contract are called Mini Lot which is 1/10 of a standard Bitcoin contract.

Mini Lot = 0.1 Unit of Bitcoin

These smaller-volume Bitcoin trading units (mini lots) were introduced with the objective of increasing the accessibility of the online Bitcoin Cryptocurrency trading sphere to retail investors and, in turn, attracting a larger volume of these investors. This accessibility may account for the massive popularity surge in online Bitcoin trading, allowing entry into the market with capital as modest as $110.6.

This is also another reason why Bitcoins are traded in contracts so that traders can also trade fractions of bitcoins - fractions of bitcoin contracts.

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