For those interested in trading crypto but do not have a large amount of capital to start with, leverage and margin trading could be the option. Leveraged trading lets you borrow money from a broker to increase your buying or selling power, offering the potential for greater profits. Learning what is crypto leverage trading can give you a better perspective on how to manage your positions.
Leverage is considered an essential tool across traditional and cryptocurrency markets as traders do not have to lock up entire amounts of capital resulting in better capital efficiency. Together with futures and options, leverage trading help introduce liquidity into the market.
Leverage trading can, however, be confusing for beginners. Before experimenting with leveraged funds, it’s crucial to understand what it is and how it works. This article will focus on leverage trading in crypto markets and its potential upsides/ downsides.
How does Crypto Leverage Trading work?
Crypto leverage trading uses borrowed crypto funds to increase one’s trading position beyond what would be available from their cash balance alone. Such a market position is called a leveraged position.
With a margin trading account, you put in a fraction of the total order value. Leveraged funds fill up your order amount. The leveraged/borrowed funds give you increased buying power by allowing you to open more prominent positions than you would ordinarily be able to if you could only use the money in your account.
The number of funds traders can leverage is represented as a fraction or a ratio. For instance, a ratio of 1: 10 means that for every unit of crypto, you can get 10 more.
Say you want to invest $1,000 in Dogecoin (DOGE) with a 1:10 (10x) leverage. The margin required would be 1/10 of $1,000, meaning you need to have $100 of Doge in your account as collateral for the borrowed capital.
If you use a 1:20 (20x) leverage, your required margin would be even lower, 1/20 of $1,000 = $50. The downside of increased leverage is that it raises the risks of liquidating.
Apart from the initial capital, you will also be required 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 top-up more funds into your account to avoid liquidating. The threshold position is also known as the maintenance margin.
Example of a Profitable Leverage Trade
Leverage can help you to make more profit from a trade, but it can also amplify your losses.
Say your broker offers you 100:1 leverage, meaning you can open positions worth $100,000 with just $1,000 initial capital. You then buy 100,000 DOGE/USDT currency pair units at $0.057 per unit.
With leverage, you only need to put up $57 of your own money (0.057 x 100,000 units / 100x leverage). The rest is borrowed from your broker, making your position worth $5700.
If the market rises by just 5%, your position becomes worth $5,985, giving you 5x profit ($5,985-$5700=$285) on your initial $57 Doge investment.
Example of a Loss-Making Leverage Trade
Let’s say you’re using 100:1 leverage, buying 100,000 units of the DOGE/USDT currency pair at $0.057 per unit. Your leveraged position is worth $5,700 (100,000 x 0.057) using just $57 worth of capital.
Like before, your profits are exponentially higher if the market goes up, but the market would only have to fall by 1% to lose your entire $57 investment.
To avoid liquidation, you can add more funds to your trading account to increase your collateral.
In most cases, the exchange will send you a margin call before the liquidation happens – a notification telling you to add more funds to avoid liquidation.
Example of a Short Leveraged Position
Now, imagine that you want to open a $10,000 short position on Doge with 10x leverage. In this case, you will borrow Doge from someone else and sell it at the current market price. Your collateral is $1,000, but since you are trading on 10x leverage, you can sell $10,000 worth of Doge.
Assuming the current Doge price is $0.057, you borrowed 175,438.60 Doge and sold it. If the Doge price drops 20% (down to $0.0456), you can buy back 175,438.60 Doge with just $8000. The trade would give you a net profit of $2,000 without the transaction fees.
However, if Doge rises 20% to $0.0684, you would need an extra $2,000 to buy back the 175,438.60 Doge. Your margin position will be liquidated as your account balance only has $1,000. Again, to avoid being liquidated, you need to add more funds to your wallet to increase your collateral and avoid a margin call or potential liquidation.
Why use Crypto Leverage Trading?
Because of wild market moves allowing people to profit from large and fast swings, leverage trading has become a popular trading strategy on cryptocurrency markets such as Binance.
Another reason crypto traders use leverage is to enhance the liquidity of their wallets. For instance, instead of holding a 1:2 leveraged position on a single exchange, they could use 1:4 leverage to maintain the same position size with lower collateral. The extra liquidity would enable them to use the other portion of their money in another place, like trading another asset, staking, liquidity provision to decentralized exchanges, or even investing in Nonfungible tokens.
Cryptocurrency Leverage Trading Strategies
There are multiple strategies to apply to crypto leverage trading. Here are some to consider for your leveraged trading work.
- Increase your trade sizes gradually, especially for margin trading beginners. Start with Small positions and increase your leverage only as you earn more experience; this is an effective strategy to limit risk.
- Practice leverage trading with a demo account — Using a demo (account funded with test funds) account such as eToro, you can learn the ins and outs of leveraged trading without risking your capital.
- Setting a sensible risk management strategy with clearly defined profit goals can significantly assist you in avoiding emotional decision-making that may result in a loss.
- Divide your Positions into separate portions; for example, you could set a series of taking profit orders to capture your profits incrementally rather than all at once when your single take profit is reached.
- Limit the time you hold any position to limit the risk of unforeseen price crashes and long-term market corrections, and diversify your portfolio on the crypto exchange.
How to Manage Risks with Leveraged Trading?
- Stop Loss: A Stop Loss is a risk management strategy designed to close a trade at a specific price if the market moves in an unpredictable direction. It is a constructive way to keep losses in check.
- Only invest funds you can afford to lose, no matter the success rate of your strategy; margin trading crypto can go against you exceptionally quickly, so you should never invest more than you can afford to lose. As a rule of thumb, risking more than 5% of your account is asking for trouble. You want to invest an amount you could pay off should your account become liquidated.
- Take Profit is the opposite of a Stop Loss; you can set a Take Profit order to close your position when the profits hit a specific price. Because crypto markets are so volatile, it can be wise to get out before the sentiment turns in another direction.
Where to Trade Crypto with Leverage?
|Exchange||Trading Options||Trading Fee||Leverage|
|Bybit||Wide selection crypto derivatives, perpetual and futures contract||0.75% taker fee||Up to 100x|
|Binance||50+ cryptocurrency futures, with 750+ other crypto and fiat pairs||https://www.binance.com/en/leveraged-tokens/tokens/allTokens||Max of 10x|
|FTX||20 supported cryptocurrencies||0.020% maker fees and 0.070% taker fees|
|KuCoin||100 cryptocurrencies||0.1% for each spot trade||Up to 20X & up to 100X|
Not all crypto exchanges support leverage trading, so to begin, you will have to select a crypto exchange first. To ease the process for you, below are the top exchanges where you can trade crypto with leverage:
Bybit is one of the top platforms by active trading volume. The exchange makes it super easy to start crypto trading, and you can buy, sell or trade popular cryptocurrencies like Bitcoin, Ethereum, Litecoin, Ripple, and more.
The exchange also offers you a wide selection of crypto derivatives, perpetual and futures contracts.
Bybit offers you up to 100x leverage, one of the highest in the market. Along with that, Bybit charges a low 0.75% taker fee for market orders.
Notably, Bybit charges fees on the whole position and not on your initial margin meaning you have to pay fees based on your leveraged position.
Binance is the world’s largest cryptocurrency exchange based on trading volume. And for leverage trading, Binance Futures is the best option out there.
With Binance futures, you can trade in 50+ cryptocurrency futures, with 750+ other crypto and fiat pairs. Some popular cryptos on Binance are BNB, DOGE, ETH, BCH, XRP, BNB, and EOS.
Binance has a diverse portfolio of leveraged products, such as USD-M futures and perpetual margin contracts. Coin-M futures are futures contracts and traditional futures contracts, and Binance leveraged tokens let you trade crypto with leverage and Binance options for options trading.
Binance futures has one of the lowest trading fees in the market.
With FTX, you can easily buy and sell cryptocurrencies instantly. The exchange gives you access to one of the most competitive trading fees in the industry.
In addition, FTX has over 20 supported cryptocurrencies, such as Bitcoin, Ethereum, Dogecoin, Shiba Inu, Solana, and Ripple.
FTX has index futures and offers you 101x leverage on all FTX leveraged tokens.
However, the maximum leveraged position is set to 10x as a risk measure.
Exchanges. Under tier 1, traders pay 0.020% maker fees and 0.070% taker fees.
On KuCoin, you can set leverage up to 20x on regular assets (between 1x and 20x). For popular coins such as Bitcoin and Ethereum, leverage can also be increased up to 100x. KuCoin Futures supports more than 100 cryptocurrencies including Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Cardano (ADA), Ripple (XRP), Fantom (FTM), Polkadot (DOT), Terra (LUNA), ChainLink (LINK), Avalanche (AVAX), and many more.
KuCoin charges only a “flat fee” of 0.1% for each spot trade, significantly lower than the industry average. This flat base fee doesn’t matter even if the coins gain and lose value.
Why is leverage trading NOT allowed in all exchanges?
Only a few platforms have licenses to trade in mild leverage. First and the most prominent among them is undoubtedly the Kraken, which offers 5x leverage for all trading pairs. Admittedly, that’s a tiny amount compared to leverage in other countries, but better anything than nothing. The biggest thing that hinders this leverage trade in the USA market is the possession of licenses. Every American state has its own laws and financial regulations that brokers must respect.
Traders from the USA have thought of solving this problem in their favor by using VPNs with IP addresses of other countries for crypto trading, but this is illegal and consequences of being caught is real. KuCoin is one of the rare crypto exchanges that still allow U.S. traders to access its platform, but it is risky to do so. First, if the U.S. finds that you are using unlicensed exchanges, your assets could get frozen. Next, KuCoin doesn’t provide the same support to accounts without KYC in the case of fraud, theft, or hacking.
Leverage is a great trading strategy for seasoned trades; it can be pretty daunting for the uninitiated. Leverage gives users with low initial investment the potential to bring higher profits. While leveraged trading can multiply your potential profits, it is also perilous, especially in the volatile crypto market. With FTX, you can easily buy and sell cryptocurrencies instantly. The exchange gives you access to one of the most competitive trading fees in the industry.
Still, leverage combined with the crypto market volatility could cause liquidations quickly, especially if you prefer higher to lower leverage. Always trade crypto cautiously and evaluate the risks to avoid a margin call on your account. Keep the leveraged trades and margin threshold in check and take potential profits before the market sentiment changes.
Finally, never trade funds you cannot afford to lose; market volatility can be your foe. Trading tips abound but you need to make sure which ones are worth the risk and if you can manage to absorb any losses. Take a look at some of our tested tips for rounding up your skills. As for all who wants to go to war, best be prepared for the worst encounter.
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