Crypto trading with leverage: features and Nuances

Have you ever wondered how to use leverage in cryptocurrency trading? The amount of leverage in cryptocurrency, depicted in the ratios, looks like this: 5x corresponds to a ratio of 1:5, and 20x — 1:20. Thus, the coefficient shows how the trader's capital is multiplied.

In this article, we will look at how to use leverage in cryptocurrency, as well as some exchanges that offer it. To begin with, let's look at some examples of trading in real life.

What is crypto trading with leverage?
Crypto Trading with Leverage and How It Works
How to use leverage in cryptocurrency?
Short position
Why use leverage?
Risk management when using leverage
Margin Call
Pros and cons of margin trading in cryptocurrencies
Cryptocurrency Exchanges with Leverage
Using tokens with leverage
Characteristics of tokens with leverage

What is crypto trading with leverage?
Let's say a trader has $100 in his account. But he is sure that the price of Bitcoin will rise soon. And the problem is that he only has $100. To maximize profits, he can open a position with 10x leverage, increasing his purchasing power to $ 1,000. The leverage ratio in this transaction will be 1:10 ($100 x 10 = $ 1000).

The good news for crypto traders is that they can use their positions in different ways. Margin trading and futures contracts originate from traditional finance, but tokens with leverage are peculiar only to the "crypto universe".

Crypto Trading with Leverage and How It Works
Using cryptocurrency leverage when trading, you must first deposit funds (i.e., collateral) into your margin account.

crypto trading with leverage

For example, a trader wants to bet $1000 on Ethereum (ETH). But they only have $100. In this case, he will need to apply 10x leverage. The required margin at a ratio of 1:10 will be 1/10 of $ 1000, or $ 100. Thus, the trader can use his $100 as collateral.

Along with the initial margin requirement, the trader must maintain a margin threshold known as the "supporting margin". Therefore, if the market price moves against the position and reduces the margin below the threshold, the trader must add more funds to his account to avoid liquidation. Liquidation, in turn, means that the exchange takes the trader's collateral.

So, what is leverage trading? Simply put, it is a way for traders to maximize their profits by using other people's money.

How to use leverage in cryptocurrency?
Crypto traders can use leverage to open long or short positions. If the investor expects the price of the cryptocurrency to rise, he will open a long position (buy). If another trader predicts that the price will fall, he will take a short position (sell).

The above scenario demonstrates standard trading. However, by applying leverage, a trader can borrow on margin.

If a trader opens a long position on BTC for $ 10,000 with a 10-fold leverage, he needs to deposit only $1,000 as collateral. If the Bitcoin price jumps by 20%, the trader will make a profit of $ 2000. This is much more profitable than using only $1000 capital. In this case, he would have received only $200 profit without margin loans.

On the other hand, if the Bitcoin price drops by 20%, the trader will lose $2000. Therefore, remember that 10x leverage works both ways. In this case, since the collateral requirement was only $1,000, a 20% drop in BTC will lead to the liquidation of the position before the 20% fluctuation ends. Thus, a 10% drop in the price will lead to liquidation. (10% x 10,000 US$ = 1,000 US$).

However, different exchanges use different liquidation values. Moreover, they will send a "margin call" to the trader to warn that the value of the account has fallen below the supporting margin.

The margin requirement gives the trader the opportunity to add more funds to his account in order to avoid liquidation. If you are studying how to use leverage in cryptocurrency, do not forget to learn about margin calls.

Short position
Let's flip the scenario to the short side, where the trader wants to open a short position for $10,000 with 10x leverage. The required deposit is the same as for a long position — $ 1000.

So, a trader sells BTC for $ 10,000, and the price drops by 20%. Now a seller in a short position can buy the same amount of BTC for just $8000. In this case, the seller in a short position makes a profit of $ 2000. On the other hand, if the Bitcoin price rises by 20%, the "short" seller will need to add more funds to his account to avoid liquidation.

Note. None of these examples take into account margin trading fees.

More importantly, before you can successfully open long or short positions in the cryptocurrency markets with or without leverage, you need to predict the future direction of the price.

Why use leverage?
If you have ever wondered, "What is cryptocurrency trading with leverage?", then you need to understand that traders use leverage to increase the size of their position and maximize profits.

In addition, when determining how to use leverage in cryptocurrency, traders should ask themselves: "Why use it?". In addition to maximizing profits, another reason for margin trading is to increase liquidity.

For example, a trader can take $1000 and invest it in one trade with a leverage of 1x. Or take a position with 4x leverage with the same collateral in the amount of $ 1000.

Otherwise, the trader would have to invest $4000 of his money in the transaction. Trading on margin, you only need to invest $ 1000, leaving an additional $ 3000 for other expenses. So, a trader can, after taking a long position, earn a smaller amount of money.

Risk management when using leverage
Trading cryptocurrency with leverage requires less capital at the beginning, but it involves the risk of liquidation. Thus, if a trader receives too high a leverage ratio, a gradual price change can lead to significant losses.

ethereum - leverage

The more leverage a trader has, the more volatility affects him. Using a lower leverage implies an error in price fluctuations. Consequently, some crypto exchanges set limits on what leverage newcomers can use.

To manage risks, traders can use "stop-loss" and "take-profit" orders. These types of transactions can help minimize risk. Stop-loss automatically closes a position at a certain price, and this function saves the trader a lot when the market is playing against him.

Take-profit does the opposite. These orders close the position when the profit reaches a certain level. Take-profit orders lock in profits at a certain price before the market can change direction.

So, you have already realized that there are two sides to trading with leverage. There is both the potential for multiple gains and excessive losses. Moreover, please note that leverage increases exponentially.

Margin Call
It is difficult to correctly predict the future behavior of the cryptocurrency price. Therefore, when the asset price moves contrary to the forecast, the trader must act quickly so as not to be liquidated due to a lack of collateral in his margin account.

When cryptocurrency prices move against a trader, the exchange will seek to cover itself. If a trader does not respond to a margin call by depositing more and more funds, he may be liquidated for the total amount of the margin loan.

To avoid liquidation, traders should only risk a manageable amount of cryptocurrency (no more than they can afford to lose) and keep the "stop-loss" at the same level.

Pros and cons of margin trading in cryptocurrencies
Positive:

Volatile cryptocurrency markets mean big profits when a trader with leverage makes the right predictions. In addition, tolerance for high risk, good analytical skills and competent placement of a stop-loss order can make trading with leverage more profitable.

Minuses:

However, high price volatility means big losses for traders with leverage who misunderstand the market. Beginners can easily be liquidated, and experienced traders should be willing to take the time to monitor their trades.

Cryptocurrency Exchanges with Leverage
When discussing the question "what is cryptocurrency trading with leverage?", you need to look at which crypto-margin platforms offer the greatest leverage. Below are some of them:

Bybit
Leverage: 1:100

Coins: ETH, BTC, XRP and various altcoins.

PrimeBit (has the highest leverage)
Leverage: 1:200

Coins: ETH, BTC, LTC.

Binance
Leverage: 1:125

Coins: ADA, BNB, BTC, ETH, DOT, XRP and many others.

BitMEX
Leverage: 1:100

Coins: BTC, ETH, LTC.

PrimeXBT
Leverage: 1:100

Coins: BTC, ETH, XRP and others.

Decentralized autonomous organizations are becoming a popular way to implement community management for crypto projects.

Using tokens with leverage
Traditional margin trading when using leverage in cryptocurrency is far from the only way. Crypto offers another way, and it is "tokens with leverage".

For example, a 3-fold "long Ethereum token" (ETHBULL) will bring profit from investments in Ethereum. Thus, if the price of ETH rises by 10%, the value of ETHBULL will increase by 30%. The same calculations, but in the opposite direction, will occur when the ETH price falls.

Tokens with leverage can also be risky, so it's better to study them as best as possible so that you don't make short-sighted decisions later. Binance, KuCoin and FTX are some of the crypto exchanges that offer them.

Characteristics of tokens with leverage
Rebalancing investments
In the example above, ETHBULL offers three times more than the underlying asset. The token is automatically rebalanced to support the 3x goal. If he makes money, he reinvests the profits. If it is unprofitable, ETHBULL will sell part of its position. Tokens with leverage are usually rebalanced every day.

Binance tokens with leverage work a little differently. Instead of using a specific target, they usually use a range from 1.25x to 4x the price of the underlying asset.

Simplicity
Traditional margin trading can be complex and requires careful monitoring. On the other hand, leverage tokens are easy to use.

Zero provision
No collateral or margin requirements are required to use tokens with leverage, and liquidation risks are low due to rebalancing. Even if the value of the token drops, he will simply sell parts of his position.

Reducing volatility
This refers to the negative impact of volatility on investments. The best way to explain how it works is to give an example.

If a trader buys ETH for $1000 at once and the price jumps by 10%, then ETH is now worth $ 1100. But suddenly, the price drops sharply by 10%. 1100$ x 10% = 110. So, now the trader's assets in ETH are worth $ 990 (1100 – 110).

Let's take the same scenario with the BULLETH token with a leverage of 3x. A 10% increase turns an investment of $1,000 into a profit of 30% or $1,300. The next day, the price is reduced by 10%. A token with leverage turns this into a 30% loss. 1300 x 0.30 = $390. The resulting value is $910 (1300-390).

The fact is that the attenuation of volatility in investing occurs faster than in standard transactions.

Not always available
Many crypto exchanges do not offer leverage tokens, so, especially for US residents, they can be difficult to find.

Additional fees
There are additional fees associated with tokens with leverage. Binance, for example, charges a daily management fee of 0.01%.

Brevity
Due to reduced volatility and management fees, long-term buy-and-hold strategies are not available for tokens with leverage.