What Is Crypto Leverage, And How Does it Work?
In recent times, trading in cryptocurrencies has become widely popular, as it offers high returns when done effectively. Investing in the same has many advantages. One of the commonly used trading techniques is crypto leverage trading.
The use of leverage in trading generally refers to using borrowed money or capital for your own gains. If you don’t have enough capital to start your business venture, you can use debt or borrowed money to increase your returns.
In the stock market, if you do not have enough capital to buy any amount of equity, you can use leveraged capital. For example, if you want to buy a particular stock whose minimum lot is $1000, and you only have $100, you can use a leverage of 10x. The higher the leverage, the less capital you will require. Here, it is necessary to note that with higher leverage, the chances of risk also increase.
This is a concept that can be confusing if you are hearing about it for the first time. However, once you understand it, leverage crypto trading need not be a daunting thing while trading.
So, what does leverage mean in crypto?
Crypto Leverage Trading
In crypto, leverage means the use of borrowed capital for trading cryptocurrencies. Here you can trade with more capital than what you currently have. The amount up to which you can borrow depends on the crypto exchange you trade on.
Similar to trading on the stock market, say you want to buy $1000 in Bitcoin. However, you only have $100 in your crypto exchange account. Now, with a leverage of 10x, you can have this buying capacity.
When done strategically, leverage trading can increase your profits. However, one should keep in mind that as the leverage gets higher, the risks also rise. As the leverage increases, there will be a higher chance of liquidating. There are a number of leverage trading strategies, such as margin trading and leveraged tokens.
What is Margin Trading?
In margin trading, you can raise the limits up to which you can purchase by putting up the assets that you have as collateral. This is a strategy usually used by traders with a lot of experience. They do the same to increase their profits without being limited by the amount of capital they have.
If you want to increase your returns on either long or short positions, crypto margin trading is a strategy that may be effective. But it is necessary to keep in mind that this method can also increase trading losses. It does have higher risks involved. So before you begin crypto leverage trading or margin trading, it is very important that you read up on the same. You should be well aware of the advantages and disadvantages of this method.
How Does Crypto Leverage Trading Work?
The first step while crypto leverage trading is to ensure a certain amount of funds in your trading account. This initial money that you have is known as the collateral that you possess. The amount of collateral that you need will rely on the leverage that you are using. It also depends on the margin.
The margin is the value or worth of the position that you are looking to open.
In the example mentioned above, if you are looking to invest $1000 in Bitcoin with a leverage of 10x, then you shall require collateral of $100 in your account.
Besides this beginning deposit, you must also have a margin threshold while carrying out trades. This margin should be maintained. To prevent liquidation, you should add more capital into your account if the margin becomes lower than the threshold. This can happen if the market behaves opposite to your position.
You can apply leverage on both short and long positions. Let’s first try to understand what these two terms mean.
If you anticipate that the asset’s capital will increase, you open a long position. In contrast, if you anticipate the asset’s capital to go down, you open a short position. The difference here while using leverage and trading without the same is that if you use leverage, you can only make use of your collateral to purchase or sell your assets.
Advantages of Crypto Leverage Trading
The main advantages of leverage crypto trading are:
- Increased Revenue
In comparison to making use of just your current capital, leverage trading allows you to join the exchange with a larger stake, which results in larger returns on profitable trades. Higher leverage can give you higher returns upon effective trading.
- Easier Trading
If you want to invest in a currency or enter into positions quickly, even with a shortage of capital, leverage trading is better. You need not acquire extra funds and can act quickly.
- Open More Positions
As traders can make use of borrowed capital, they can open a number of positions if they want. They can do so with lesser funds in hand. Since they are not relying only on a single position, they can lessen the risks.
Disadvantages of Crypto Leverage Trading
The main disadvantage of leverage crypto trading is the increased risk involved.
There are raised chances of risk as well as return when it comes to leverage trading. In this case, your portfolio can take quite some damage if you acquire high losses. There is also a chance that your losses are more significant than the fund with which you invested.
Although leverage crypto trading has its perks, it is necessary to keep the risks in mind before trading or investing.
The Best Crypto Leverage Trading Exchanges
There are a number of crypto exchanges that you can use to trade using leverages. Some of the most prominent and widely used ones are:
Binance has seen tremendous growth ever since its founding in 2017. With 1.4 million operations per second, it is currently the largest digital currency trading marketplace worldwide. It is a popular trading software because of its user-friendly design and seamless operation.
FTX, which was established in the middle of 2019, offers its members an excellent level of liquidity and insurance. With its three-level liquidity regulation, FTX permits a variety of marginal currencies.
ByBit was created in 2018 and is focused on exchanging derivatives. Additionally, amateurs may utilize the platform because of its user-friendly design and ability to utilize insurance to recover losses in the event of a collapse.
Frequently Asked Questions
- What leverage should I use in crypto?
To prevent unintentional liquidation due to typical market liquidity, it’s crucial to keep lower leverages.
- Is leveraging crypto a good idea?
Leverage is a strategy that can offer both benefits and drawbacks while investing. Therefore, it is not entirely positive or negative. Keep in mind to maintain control over your risk mitigation and follow some investing guidelines.
- What does 20x leverage mean?
20x leverage essentially means multiplying the collateral with 20. If the initial fund is $100, you can have upto $2000 to invest. This can also result in steep losses if not done properly.
Crypto leverage is a very powerful strategy, but it is not one that should be used without proper guidance and information. It has the power to increase your profits or cause catastrophic losses.
I pen down crypto thoughts.