Leverage trading in crypto is a powerful tool for traders to increase their potential returns and profits. It allows them to open positions with less capital than would otherwise be required, by providing access to leverage ratios of up to 100 times the amount invested. This means that even if you don’t have much capital, you still have the potential to make big profits by leveraging the available funds at your disposal. Leverage allows traders to borrow funds from an exchange or broker in order to open larger positions than what their wallet balance would normally allow.
How does leverage trading work?
Let’s say, for instance, you only have $100 but want to invest $1,000 in a certain cryptocurrency, leverage trading lets you do this. The ratio of how much money you borrowed compared to how much money is in your wallet is called the leverage ratio. This can be 1:5 (5x), 1:10 (10x), or 1:20 (20x), and so on.
Here’s how it works:
Before opening a position, you need to deposit collateral (funds) into your trading account. The initial capital you provide is what we call the collateral. The collateral required depends on the leverage you use and the total value of the position you want to open (known as margin). Say you want to invest $1,000 in a cryptocurrency with a 10x leverage, meaning you only need to provide 1/10 of the position value as collateral. This would be an initial margin requirement.
It’s important to note that while using leverage can increase your returns, it also increases your risk. The higher the leverage, the higher the risks of getting liquidated if the market moves against your position. For this reason, it’s important to maintain a margin threshold for your trades. When the market moves against your position, and the margin gets lower than the maintenance threshold, you will need to put more funds into your account to avoid being liquidated. The threshold is also known as the maintenance margin.
Important things to know in leverage trading
Liquidation
In crypto leverage trading, liquidation happens when the market moves against your position and the margin gets too low. This means that you need to add more money to your account so that you do not lose all of your money. Before entering into leverage trading, it is important to set a margin threshold that you’re comfortable with. This way you can monitor your positions closely and make sure they don’t get liquidated.
Auto liquidation
Auto liquidation is a process in leverage trading that happens when your account balance goes too low, i.e. below your maintenance margin threshold. When this happens, the exchange or broker will sell part of your assets to make up for the shortfall since you don’t have enough money in your account.
Funding rate
Funding rates are the interest paid on the spread between the markets for perpetual contracts and spot prices, and they are distributed on a periodic basis to traders who are long or short. Since funding calculations include the use of leverage, funding rates may significantly affect one’s earnings potential. Even when in mild volatility markets, a trader who pays for financing may incur losses and be liquidated when using large leverage.
Cross-margin trade
Cross-margin trading is a negating procedure in which excess margin from one of a trader’s margin accounts is transferred to another of the trader’s margin accounts in order to meet the criteria for the required maintenance margin.
Long and short positions in leveraged trading
Long Position
When you borrow money from an exchange or broker in order to purchase more cryptocurrencies beyond what you already have in your wallet, this is known as a long position. You are basically gambling on the outcome that the price of the asset will grow over the course of time, which will result in a higher return on your investment.
Short Position
If you do not already own the asset being traded, but borrow money from an exchange or broker to make a transaction, you are taking a short position. This implies that you may earn money by selling back at a lower price and then repaying the loan and returning the borrowed cash to the original owner if the market goes against your position.
Advantages of leverage trading
1. Leverage trading allows you to buy or sell more cryptocurrency than what you have in your wallet.
2. You can increase your returns and make bigger profits with leverage trading.
3. You can borrow money from an exchange or broker to open larger positions than what your balance would normally allow.
4. You only need to put a small amount of collateral into your account before opening a position, so you don’t need much capital to start investing in cryptocurrencies with leverage trading.
5. Even if you don’t have much capital, you still have the potential for big returns by using available funds at your disposal through leverage trading.
6. With leveraged trades, you can take both long and short positions – meaning that even if you don’t own an asset yet, you can borrow it and sell it if the market goes down (open a short position).
7. Leverage trading helps reduce market risks for traders because they don’t need to hold large amounts of assets in their wallets before opening a position.
Disadvantages of leverage trading
1. When trading with leverage, your risk is magnified since a negative market movement results in a larger loss.
2. If the market turns against you, you may need to add additional money to your account to prevent it from being liquidated.
3. In the event of a market downturn, more leverage increases the likelihood of liquidation.
Crypto leverage trading platforms
Here are five platforms you can use for crypto leverage trading:
1. Binance – A leading cryptocurrency exchange that offers up to 125x leverage on many popular trading pairs.
2. Bybit – An exchange that provides up to 100x leverage on Bitcoin, Ethereum, and other digital assets.
3. BitMEX – A platform that allows up to 100x leverage on Bitcoin, Ethereum, and other cryptocurrencies.
4. Deribit – An exchange offering up to 100x leverage on Bitcoin and Ethereum with no KYC required for smaller trades.
5. PrimeXBT – A crypto derivatives platform offering high leverages of up to 1000X with low fees and fast order execution speeds..
Bottomline
Leverage trading is a great way to increase your returns and make bigger profits with less capital. However, it’s important to always be aware of the risks involved when using leverage as you can lose more money than what you have in your wallet. It’s best practice for traders to maintain an appropriate margin threshold so that their positions will not get liquidated if the market moves against them. With these tips in mind, leveraging trading offers a unique opportunity for investors looking to maximize their returns without having to invest large amounts of capital upfront.
