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What is Leverage Trading in Crypto?


Leverage trading, also known as margin trading, allows you to significantly magnify your profits in the markets. However, bear in mind that leverage is a double-edged sword - your losses are magnified as well. In the following lines, you’ll learn what leverage trading is and how to use it to trade the crypto market.

What is leverage?

Leverage refers to the use of a small amount of capital to increase market exposure and trading positions via the use of borrowed funds. Leverage is sometimes also called margin trading. With leverage, it’s important to understand that the increased market exposure leads to magnified profits, even with small price movements in the market. For example, with a 10:1 leverage, a 1% move in the market would represent a 10% profit. However, not only your profits are magnified, but your losses as well.

What is Leverage Trading in Crypto?

Let’s say that a stock trades at $50 and your analysis shows that the price could reach $60 in the coming days. With a $1,000 account and 10:1 leverage, you could buy up to 200 shares at $50 and make a $2,000 profit if your market correction proves correct.

When trading on leverage, it’s very important to develop and stick to an effective risk management strategy. Potential losses that are magnified ten or even hundreds of times can quickly lead to a trading disaster.

What is the difference between leverage and margin trading?

Leverage and margin trading refers pretty much to the same thing. Leverage and margin are similar concepts that are connected to each other. So far, you’ve learned that leverage allows you to gain large market exposure via the use of borrowed funds. The funds are borrowed from your broker, and the collateral for the loan is called the margin.

The amount of margin you need to allocate for a leveraged trade depends on the leverage ratio that you’re using. For example, a leverage ratio of 100:1 requires a margin equal to 1% of the desired position size, while a leverage ratio of 25:1 requires a 4% margin for the same position size.

Margin required leverage ratio
5.00% 20:1
3.00% 33:1
2.00% 50:1
1.00% 100:1
0.50% 200:1
0.25% 400:1

What is leverage in crypto trading

Trading on leverage works with any asset class, including cryptocurrencies. To trade cryptocurrencies on leverage, traders usually have two options to choose from: futures contracts or CFDs. Futures contracts are financial derivatives that are often used by professional traders to speculate on future price movements. Futures often come with leverage, which allows traders to increase their market exposure and magnify their trading results.

Nevertheless, the leverage ratio that comes with futures contracts is often multiple times lower compared to the leverage offered with CFDs. It’s not uncommon to see CFDs with a 100:1 leverage or even higher! This means you can control a position size of $1,000,000 with an initial deposit of only $10,000 and a leverage ratio of 100:1.

With that market exposure, you could buy up to $1,000,000 worth of cryptocurrencies, such as Bitcoin, Ethereum, or Litecoin, while allocating only $10,000 as collateral for the trade. After the trade hits your stop-loss or take-profit levels, or you close it manually, the collateral gets returned to your account and can be used for new trades.

How to manage risks when crypto trading

When trading cryptocurrencies on leverage, it’s very important to actively manage risks and always keep an eye on potential losses. Leverage magnifies both your profits and losses, which means that a few losing trades could make significant damage to your trading account. Here are a few tips on how to manage risks when trading crypto on leverage:

What is Leverage Trading in Crypto?

Pros & Cons of Leverage Trading Cryptocurrency

Trading cryptocurrency on leverage comes with both advantages and disadvantages. However, with proper risk management and an effective trading plan, traders are able to mitigate most of the disadvantages of leverage.

Pros:

Cons:

Cryptocurrency Leverage Trading Strategies

Day trading and swing trading are the most popular trading styles used by retail traders to trade cryptocurrency on leverage. Day trading is a fast-paced trading style that involves opening and closing trades within the same trading day, while swing traders keep their trades open for days or even weeks.

Trade in fiat currencies. If you’ve already placed a trade on the crypto market, you may have noticed that altcoins are paired with Bitcoin and that Bitcoin is usually paired with USD. This means, when the market is in a bear phase, it’s better to trade with fiat currencies.

While trading altcoins is a great way to accumulate more Bitcoin, you need to be cautious during times of bear markets, as using a depreciating asset as your collateral can lead to larger losses.

FAQ: Frequently Asked Questions

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