How and where to leverage trade cryptocurrency

Unlike regular trading, margin trading could result in losses that exceed your initial investment–even a small drop in the market price can be amplified and cause significant losses. Margin capital is a secured loan and thus bears an interest rate and requires a collateral, which your exchange sets. Moreover, your account level and the amount you borrow significantly affect your interest rate. In margin trading, you should also retain a margin balance, commonly known as a maintenance margin, in your account to take care of losses.

• A great way to make good predictions of the market is to make a technical analysis of the coin you are trading and base your next position on this analysis.
• So, it’s often recommended to get some spot trading experience first – learn to work with technical indicators, track market performance, and even compare different trading platforms.
• Then the broker will refer to the original investment you make as the collateral.
• The lending platform agrees to absorb the loss if your account’s equity goes negative as a result of the leverage.

If you want to open a long position of $10,000 worth of BTC with 10x leverage, you will use $1,000 as collateral. Apart from the initial margin deposit, you must also maintain a margin threshold for your trades. It would be good to use a demo account first to become proficient with technical analysis and understand market trends.

Keep a Separate Account

Holding a position for a prolonged time can also require daily fees. So, some traders may run out of funds simply by opening too many positions that they can’t pay to keep running. The easiest way to describe crypto leverage trading and long positions is to begin with a concrete example. Let’s say that you open a long position on Bitcoin for $10,000 with 10x leverage. While trading crypto futures can be highly rewarding because of the high leverage offered, the losses can be equally huge and sometimes bigger than the collateral.

Different exchanges pay you a different percentage of cash depending on the amount of cash you have in your trading account. Crypto traders who want to give it a try in margin trading and do not have enough funds can borrow money from a broker to invest in the business of trading financial assets. This amount represents the collateral for the loan from the broker. Lenders benefit from lending to traders who need it because they receive interest earned from the loan.

What Is Leverage in Crypto Trading?

Read further to learn how to leverage trade crypto and build your portfolio quickly. As usual, please remember this article is based on my own experiences in trading, and it does not constitute financial advice. Do your research, try new things out and let’s continue to make some money.

• Keep in mind that the higher the leverage you use means you have a lower margin of error to reach your liquidation point.
• If the price drops 20% to $32,000, you can buy back 0.25 BTC for just $8,000.
• Traders who are experienced, have understood the risks and want to attempt margin trading can do so with proper risk management strategies like stop-limit orders.

Alternatively, if going short, traders expect the asset’s price to decline. Therefore, it’s essential to find exchanges that support leveraged trading and operate in the US. All the exchanges discussed above are top-notch, so you can choose one based on your preferences. Huobi is also one of the trusted platforms to buy and sell cryptocurrencies. The platform sells more than 348 digital assets, and it is operational in more than 195 countries. While it seems like a great idea to use leverage trading, you should know that it comes with high risks.

What Is Leverage in Crypto?

Leverage trading strategies like margin trading can potentially increase your profits. Lastly, liquidation is the forced closing of a trader’s position because of the fractional or complete loss of the initial margin. This often occurs when traders lack adequate capital to maintain their positions. You should establish your stop loss and take profit levels for every trade precisely through insights you get from your technical analysis and other trading strategies. These levels will enable you to find the rewards for each amount you risk per trade or the risk/reward ratio. After determining your risk per trade, you should scan your trades using the risk/reward ratio.

• The higher the leverage, the smaller your volatility tolerance — if your leverage is too high, even a 1% price movement could lead to huge losses.
• Now that you know your risk per trade and your risk/reward ratio, you can determine the amount of money you should invest per trade.
• Using lower leverage, on the other hand, gives you a wider margin of error.
• Let’s first begin with the definition of cryptocurrency, how it works and how it is being traded on modern crypto platforms or exchanges.
• High returns are usually accompanied by high risks, and this is true for margin trading as well.

Regardless of the effectiveness of your approach, leverage trading can turn against you quite quickly, which is why you should never invest more funds than you can afford to lose. In general, putting more than 5% of your crypto portfolio at risk is a bad idea. You would want to invest money that you can pay back in case your trade doesn’t work out. Its primary advantage is that leverage immediate edge a scam trading provides a way to trade an asset without having to pay its full price. A trader using leverage can gain considerably by using a smaller amount of money to acquire assets with a higher potential return. If you are thinking of diversifying your portfolio into other crypto, but only have a small capital to do so, you can use margin trading to increase your buying power.

Leveraged Tokens

The maximum period most exchanges will allow you to maintain your leverage positions is one year. You should monitor your open positions throughout this time to ensure you don’t miss your token’s peak price for maximum profits. Inexperienced traders often open big trade sizes, hoping to reap big rewards. That’s awesome if your trade goes as planned, but you must consider what might happen if your trade doesn’t go as planned.

• Deribit is a popular crypto derivatives exchange that offers cryptocurrency futures and options with a maximum leverage of 100x on BTC and ETH contracts.
• The total margin capital for each leverage ratio that you have to add to the total position size is written in cursive script.
• On the other hand, suppose you borrowed 0.25 Bitcoin, sold it, and the price of Bitcoin at the time was $40,000.
• While it seems like a great idea to use leverage trading, you should know that it comes with high risks.
• Moreover, your account level and the amount you borrow significantly affect your interest rate.

The vast trading volumes in the crypto space have caused some traders to fear missing out on possible huge profits from trading cryptocurrencies. This fear has even led some traders to resort to borrowing funds from brokers to increase their buying power in hopes of amplifying gains. Margin is the funds borrowed from the broker used to purchase digital assets. Leverage trading is a tool that allows you to trade with a lower initial investment, multiplying both profits and losses, so there is a high degree of risk involved. Binance Margin Trading grants eligible users access to funds from the Binance Exchange for use in leveraged trades.

Never risk more than you can afford to lose

With a 24h derivatives trading volume of around $800 million, Deribit is one of the most popular cryptocurrency exchanges for leveraged trading. Research from Themoneymongers.com revealed FTX exchange has also developed an innovating asset for crypto traders, which is known as leveraged tokens. These are ERC20 tokens that have exposure up to 3x applied to the trading pair. FTX is also one of the best crypto exchanges for leverage trading.

Then we’ll take a look at how leverage can be used in spot and derivatives markets. If you’d like some background knowledge before you take a deep dive into leverage, you can find our guides on how spot trading works and what margin trading is. In fact, the easiest and safest way to add margin trading to your investment portfolio is through crypto copy trading in which rent margin trading bots created by expert bot creators. And the best place to find profitable, battle-tested bots is the Trality Marketplace. Longing is basically betting on the fact that an asset is going up whereas shorting is the complete opposite, you bet that asset is going down.

How Does Leverage Trading Work?

Of course, looking into the history of a trading pair alone won’t be enough if some unexpected breaking news flips the market upside down. However, you shouldn’t blindly follow the market trends just because a friend of a friend told you to. For this, it is necessary to take your time to understand how it works and ensure its use is always controlled by applying the tips – we have given. However, if Bitcoin increases by 20% to $48,000, you would need an additional $2,000 to buy back the 0.25 Bitcoin. Since there is just $1,000 left in your account, your position will be liquidated. With Trality’s unique Margin Trading functionality along with our fully flexible Python Editor, Creators can develop profitable market-neutral strategies.

• Now, simply listing all the pros and cons without explanation will do not be good, so for each point, I have added a small description to let you know how I see these good and bad aspects.
• Opening a long position means you expect the price of an asset to rise.
• The easiest way to describe crypto leverage trading and long positions is to begin with a concrete example.
• Leverage can multiply or decrease the outcome of a trade, so balance is key here – and mastering it isn’t something many traders can do in a day.

Learn this and more about the top crypto ETFs & ETPs in the world. Depending on your coin pairing, Binance leverages differ and can be up to 20x. Interest rates also vary based on your margin account level and the type of asset you borrow. When you pay your interest rates using BNB, you’ll receive a 5% discount. From the illustration above, it’s evident you can leverage to obtain a significant amount more exposure of an asset with minimal capital in your trading account. This article will focus on leverage trading in crypto markets, though a great portion of the information is also valid for traditional markets.

What Is Leverage in Crypto Trading and How to Use It?

One of the best ways to grasp its workings is by trying it out on a simulated account since it doesn’t involve any risks. If the price rises by 5%, your profit will also rise by 5%, which means you will have $105. So if you have a 5% increase, the result will be multiplied by ten (the leverage), which means you will have 50% profit instead – of the 5% you had without leverage. When compared to conventional trading, you can make significantly bigger gains with a far smaller investment. You only pay a small fraction of the asking price for a position rather than the entire amount. On the flip side, your position would be down $2,000 if Bitcoin’s price drops by 20%.

• Still, there is always a high level of risk when margin trading crypto.
• If you want to open a $10,000 short position on BTC with 10x leverage, you must borrow BTC from someone else and sell it at the current market price.
• Fees are steeper than most other platforms, but the convenience of a smooth mobile application may be worth your while.
• The required collateral varies depending on the leverage you choose and the total value of the position that you wish to open, which is called margin.
• These are the two essential leverage calculations that every investor needs to know before getting started.

It’s a type of investing where you use borrowed funds from your trading platform to access more capital and open bigger positions. There are two things that you will find out by calculating your leverage when trading cryptocurrencies. First, your margin requirement, or how much of your own capital you need to put down to open a position. A great way to make good predictions of the market is to make a technical analysis of the coin you are trading and base your next position on this analysis.

Knowledge is Power.

Gaining experience in predicting how much an asset is likely to move up or down and practicing using leverage increases your chances of successful trading. With hundreds of leverage trading platforms out there, it can be daunting to select the exchange for you. I’ll briefly cover a few exchanges I think are excellent and highlight some key differences between the two. The calculation of leverage ratios in cryptocurrency goes on like this and to explain things further I’ve included a table below with the most common ratios of both margin and leverage.

• If you prefer to trade on your mobile phone, ByBit is the way to go.
• This is because no trade has an assured outcome, and over-leveraging will put your wallet balance at high risk if the trade continuously goes against your prediction.
• On KuCoin, you can set leverage up to 20x on regular assets (between 1x and 20x).
• On the other hand, leverage trading often involves the trading of perpetual contracts that does not use an interest rate but rather a funding rate.

You can open long and short leverage trading positions for Bitcoin, Bitcoin Cash, Ripple, Ethereum, and more on Kraken. The exchange is proactive in providing better customer support to its users; therefore, they will guide you accordingly on how to move along. Though 15% or 25% risk per trade is more profitable, you could easily blow up all your investment in less than five poor miscalculations. As such, the 2% risk per trade aims to leave you with substantial funds in your trading account even after incurring multiple consecutive losses.