Bitfinex offers three main functions. Each function has a different wallet for organizing funds associated with that feature.
The exchanging of bitcoins and/or litecoins works like any other bitcoin trading platform by placing your offer to buy or sell bitcoins in the order book. When one order is matched against another, the order is executed. The Exchange Wallet is used for this feature.
Our margin trading feature allows you to use funding from peer-to-peer margin funding providers (see section below, "Margin Funding") to trade bitcoins and litecoins. You are always responsible for the accrued margin funding fee, at the rate in effect for the margin funding involved in each position you take.
For example, let's say you want to open a long position for 10 bitcoins. That means you want to buy 10 bitcoins hoping the price will go up. The system will borrow for you 10 * the price of Bitcoins in US dollars (let's say 2,500 USD, 10 * $250) from margin funding providers, at the best rates available. When you close your position, you will reimburse the 2,500 USD plus the funding fees that have accrued. Margin funding fees are added to your balance once per hour.
There are two ways to pay the margin funding fees (the "margin funding type"):
At any time, you can close your position. This will reimburse your lender, and your position will be settled either at a profit or a loss, according to the price at which you close your position. The same goes for a short position, where you borrow bitcoins or litecoins instead of dollars. If there is no margin funding provider available, you will not be able to open a position. Your order status will be cancelled with a status indicating "NO RESERVE".
The Trading Wallet is used for margin trading. It cannot be used for buying or selling bitcoins or litecoins for the purposes of deposit or withdrawal, that is, all positions that are opened must be closed to unlock the P&L and the underlying collateral. Balances in this wallet are collateral to cover for potential losses that may occur. If losses mount and you overall net balance goes below the maintenance requirement, your position may be force-closed to avoid further losses.
Our peer-to-peer margin funding feature goes hand in hand with the margin trading feature described above. If you are not a trader and prefer steadier returns, this feature may be for you.
Bitfinex allows you, using your Deposit Wallet, to provide margin funding to other traders in the form of bitcoins, litecoins and/or US dollars. You can enter offers with your own chosen terms (daily rate of return, duration, and amount). When an offer is taken by a trader, the money in your wallet will be used to buy or sell bitcoins and/or litecoins, a margin funding contract will be opened. When the position closes the funds used in that position are returned to your wallet. Fees to the funding providers are paid daily at approximately 1:30 UTC.
You are not exposed to exchange risk when providing margin funding with Bitfinex. The exchange risk is taken on by the trader, and in the case that the position loses money, the trader will cover the loss using funds in his trading wallet.