Trading Crypto with Leverage – The Complete Guide
Ancient Greek scientist and engineer Archimedes once said, “Give me a place to stand and I will move the earth.” It was about a physical lever, when finding the right point of support for which you can reduce the effort to raise the object. In trading, such a tool is leverage. Using it, you will be able to quickly and with minimal effort to get many times more profit, but first you need to carefully familiarize yourself with this trading tool.
What is leverage trading?
Leverage trading is a system of trading using borrowed funds. Using such a system, the trader can make trades for an amount many times greater than the balance on the stock account. Thus, increasing their risks and chances to make a big profit.
If you draw an analogy, imagine that you are sitting at the blackjack table and the dealer gives you an ace. You’d like to increase your bid, but you don’t have the money. Fortunately, there is a friend of yours who offers you another $50 with the condition that you give them back later. Now, if you win, you can win big money, return $50 to your friend and another part of the victory. But even if the bet doesn’t play, you’ll still need your friend $50.
Of course, with cryptocurrency assets everything is a little less risky.
First, exchanges usually automatically close margin orders if the trader starts to go into the negative.
Secondly, with the right approach, you have on hand a valuable asset, the value of which can still change more than once.
The leverage today is provided by many cryptocurrency brokers, such as FXOpen. Sometimes traders have to pay brokers a small commission for the use of leverage, but not always. And for some brokers, margin trading is only available to traders who meet certain requirements.
How does leverage trading work?
The principles of margin trading are easiest to look at by example. Let’s say that you made a $25 deposit on the exchange. You are sure that the value of Bitcoin will go up and therefore I would like to make a deal for a large sum. Crypto-exchange offers you a leverage of 4:1, where 1 is the amount of your capital. So, with $25 in your account, you can get another $75 and make a $100 deal.
If the trader’s assumptions were correct, he will receive a profit based on the deduction of the loan amount ($75 in this example) and a small commission. And since the transaction was made for the amount of 4 times the balance of the account, the profit will be 4 times more than it was supposed, if the trader put only his money.
If the transaction does not go according to plan and the trader starts to lose money, then as soon as your balance falls below the required margin, the exchange will liquidate your assets to return your funds, or simply ask for money from you.
As you can see, margin trading is quite simple. You just need to study the rules of the exchange or broker on the provision of leverage and familiarize yourself with the basic terms.
- Leverage — the ratio of borrowed capital to equity.
- Margin — is a deposit that is blocked in the trader’s account when opening a margin trade.
- Margin Call — is a situation where a broker (exchange) sends a notice to the trader that he needs to deposit additional funds into the account, otherwise his margin transaction will be automatically liquidated.
- Liquidation — the closing of a deal by a broker to prevent the loss of borrowed funds.
- Spread – the difference between the most expensive buy order and the cheapest sell order.
Trading with leverage
In practice, trade with leverage and without it is almost the same. Using leverage you can still play on raising/lowering or hedging risks. Only a few additional steps are added to the transaction.
Each exchange and each broker has its own order of margin trading, so be sure to study the conditions on the chosen platform.
You can use your leverage until you decide to terminate and repay the debt in your personal account. Or until your broker or exchange closes the position. If your margin falls below the rule-set mark, you will receive a margin call. This means that you must either deposit additional funds into a margin account or reduce the amount of collateral by partially repaying the debt. If the trader does not take any action and the margin is equal to the loan (1:1), the position will be automatically eliminated.
Benefits of margin trading
Leverage is a fairly simple and affordable tool that allows you to earn many times more and has very obvious and understandable advantages:
- Increased purchasing power. By borrowing funds, you can gain control over much larger market positions. Formally, having 1 BTC, you can borrow 2 more BTC and trade as if you have 3 BTC. Moreover, if something goes wrong, you will lose 1 BTC, not three.
- A favorable combination with high market volatility. The digital asset market is highly volatile. Its dynamics do not allow long waiting for the growth of trading capital – those who bought assets last week may be many times richer than their followers. In such conditions, getting big capital here and now is priceless.
- The ability to make a profit during a market fall. Trading with leverage is possible both up and down. You can make a profit even if the value of the asset goes down.
- Easy access. To get leverage in the cryptocurrency market, as a rule, is many times more than in others. You can get access to margin trading no matter where you are from, what you do and what kind of education you have.
- Low interest rate. Often times, marketplaces charge a relatively small fee for the use of credit funds, and sometimes refuse it entirely. The interest is disproportionately small compared to if, for example, a trader decided to increase his investment capital by borrowing from a bank. Prospects for small traders. It is usually difficult for traders with a small starting capital to increase it quickly, due to the fact that they can open positions only for small amounts, and accordingly fix a small profit. Margin trading solves this problem.
With the right approach, margin trading can significantly increase a trader’s income and at the same time does not require any special efforts.
Disadvantages of leveraged trading
Of course, like any other financial instrument, margin trading has its drawbacks:
- High volatility. The digital asset market is subject to increased volatility. And while this can bring you huge profits, it can also deprive you of capital. You need to be doubly careful with margin trading.
- Increased risks. This is perhaps the most key drawback of leveraged trading. By opening large trades, you can quickly lose everything you trade. However, if you use stop loss orders correctly, these risks are significantly reduced, as well as the likelihood that your position will be liquidated. You need to be able to stop in time. The situation should never be brought to a Margin Call situation, and even more so to the liquidation of a position.
- Experience is required. Despite the fact that even novice traders can get access to margin trading, first it is recommended to thoroughly study the market and the features of the game on it. If a trader has no stop loss and his position is liquidated, he loses his entire trading amount.
- The need to pay commissions. Yes, the fees for margin trading on cryptocurrency exchanges are relatively small, but they are there. Once you have approved the loan, you should already, regardless of whether your leveraged cryptocurrency trading is successful or not.
- Another unobvious disadvantage of margin trading — is the imaginary funds on the account. It is imperative to remember that this is not your money or your assets. In fact, you are trading what is not. A trader must definitely control his emotions and do not forget that his total amount includes leverage, and he will also have to pay a commission for using funds. You need to focus on the amount of capital available, and not give in to greed and fear.
Bitcoin leveraged trading – is it worth it?
According to practical observations, the effectiveness of margin trading in Bitcoin and other cryptocurrencies directly depends on the professionalism and experience of the trader. Tactical strategies for increasing capital with margin trading does not differ from those used in conventional trading. Therefore, for those who know how to successfully increase their capital by trading, margin is an opportunity to do it several times faster and more efficiently.
In addition, leveraged margin trading allows you to open larger positions and compete with large players. The borrowed funds can also be used for dumping and pumping.
Newbies can also try this tool, and thus build up trading volumes faster. But before you start using leverage, you should definitely familiarize yourself with the basics of trading and the features of margin trading. Otherwise, there is a huge risk to quickly drain all the capital. Trading on margin is one of the most risky strategies on the market. It requires increased caution and discretion. You need to understand that not only the potential profit, but also the loss increases with proportional leverage. And remember that the trader’s knowledge, correctly defined points of entry and exit from the market, and not the amount of the transaction and not the leverage, affect the success of the transaction.