Leverage Crypto Trading. One strategy that seasoned traders employ to boost their profits is leverage. Several markets, including cryptocurrency, equities, and forex, can benefit from it. The basic idea behind leverage is that it allows you to trade more efficiently with less capital, increasing your profits. Learn the ins and outs of leverage crypto trading with this comprehensive tutorial that covers the foundations of the strategy, including how it works, how to calculate leverage, and how to minimize risks.
What is Leverage Trading in Crypto?
Using leveraged cryptocurrency trading, wherein you borrow assets from exchanges, might boost your trading capability. You can buy and sell more effectively with borrowed money. This will make it seem like you have more cash than you have. Furthermore, the leverage is determined by the exchange you select. With just $500 in your wallet, you may trade with amounts as large as $50,000! That’s because certain exchanges provide bonuses of up to 20 times your wallet deposit!
The “X” is a typical way to signify the multiplier in leverage; for instance, 2x would indicate twice the leverage, allowing you to begin a position twice the size of your initial investment. This means the ratio measures the broker’s ability to multiply your wallet deposit. Start with $200 in your wallet and multiply it by 10 to get $2,000 in capital when you establish an Ethereum position with 10x leverage.
Cryptocurrency derivatives, futures contracts, and other financial instruments can all benefit from leverage. There is no such thing as a free lunch; increasing the risk level you take to improve the possible return also increases the risk you run the chance of losing.
This behavior can be better understood with a thorough understanding of leverage trading. You need to deposit assets into your Bitcoin trading account before you can start a leveraged deal. The amount of collateral required is proportional to the leverage you choose and the size of the position or margin you intend to set up. To trade $500 worth of Bitcoin with 2x leverage, a minimum collateral deposit of $250 is necessary. Remember that using additional leverage increases your potential profits and losses if the transaction fails.
Exchanges mandate that leverage traders have sufficient margin for their deals in addition to the collateral. If the asset’s price decreases as you buy it, your margin will shrink. If your margin drops below zero, your broker will trigger a forced liquidation or request further deposits. The second scenario involves insufficient money, leading to liquidating your trading position, which will likely incur a liquidation cost.
Why Should You Use Leverage in Crypto?
Experienced cryptocurrency traders may consider using leverage to maximize profits by increasing the size of their trading positions. Another example of crypto leverage trading will be used to demonstrate this point. Your trading account balance is $400, and you would prefer more money to work with. Below, you may see how leverage can assist you in implementing your plan:
The result of employing 2x leverage on $200 is $8,000. Consequently, you can get $800 worth of exposure with only $400—two thousand dollars results from $5,000 in leverage, which is $400 multiplied by $5. So, you can gain $2,000 worth of exposure to crypto for $400.
As the preceding graphic shows, leverage allows you more exposure to an asset with fewer funds in your trading account. We have already discussed the advantages of crypto leverage for seasoned traders; no, let’s briefly look at how you can use crypto leverage to become an expert in this field.
Opportunities for leveraged trading arise when one holds either long or short crypto bets. An extended position is buying an asset with the hope that its value will increase. If you are confident that the price will decrease, you can start selling or take a short position. With just $1,000 in collateral, you may begin a $ 2,000-long bet on Ethereum with 2x leverage. Assuming a 30% increase in Ethereum’s price, you will earn $600, or 60%. After increasing $1,000 by 100% (leverage) and then by 30%, the final result is $600.
You can anticipate deducting financing rates and transaction fees from your gains. However, be prepared to witness a more significant impact of leverage than investing $1,000 directly, as you would only receive $300 in return. This tactic, also known as shorting, allows you to wager that prices will decline.
We’ll open a short trade with 2x leverage this time and see what happens. You can short $2,000 with a 2x leverage. Assuming $1,000 as collateral, this is the case. You can close your short position and make 60% if the price of Ethereum decreases by 30%. After increasing $1,000 by 100% (leverage) and then by 30%, the final result is $600.
Manage Risks With Leveraged Trading
Potentially profitable trades are made possible by the enormous leverage available in crypto futures trading, but the losses might be as significant as, if not larger than, the collateral. Therefore, it is essential to have a solid strategy for managing risks. These three risk management strategies will help you get the most out of your leveraged bitcoin trades.
Establish Your Risk Per Trade
Inexperienced traders frequently open huge deals in their rush to make a killing. You should consider the worst-case scenario, even if it would be great if the deal goes through. Consequently, a stop loss is an essential instrument for reducing trading losses.
However, you will need to achieve even more significant gains to recoup your losses. For instance, a 90% gain would cover 90% of a loss, and a 1900% gain would cover 95%. Consequently, you should not expect a quick return on your investment, regardless of how well your plan works.
Put no more than two percent of your trading capital on the line in any one deal. In other words, when you’ve established your stop loss, you should limit your loss to no more than 2% of the deal value if the trade doesn’t work out. If you were to use $20,000 worth of BNB for leverage trading, a 2% risk would entail, for instance, adjusting your trade size such that you lose $400 after reaching your stop loss.
I don’t understand why each trade risk is merely 2% rather than 15% or 25%. You can lose all your money in as little as five poor predictions, regardless of whether increasing your risk to 15% or 25% every trade improves your potential gain. To ensure you can keep a big trading account balance even if you have a run of losses, the 2% risk per trade is set.
Filtering Your Trades Using Risk/Reward Ratio
After calculating your risk per trade, you can scan your trades using the risk/reward ratio. You’re essentially gambling with some of your investment whenever you open a trade. Set your stop loss and take profit levels precisely for every transaction based on the information you get from your technical analysis and other trading strategies. These levels allow you to find the risk/reward ratio, which is the potential return on investment for each unit of risk in a trade.
The risk-to-reward ratio would be 5:1 if the example stops at $400 and the take-profit amount is $2,000. Discovering your usual victory rate can help maximize the risk/reward ratio. The standard way to find the average win rate for any trading strategy is to employ the back-testing approach. Make sure the risk-to-reward ratio is good by considering your typical win rate when beginning transactions.
Determining Your Position Size
You can determine the ideal investment amount by calculating your risk/reward ratio and considering trading risk. Thankfully, most exchanges have trading tools that can help you determine how much money you made or lost when you used leveraged bitcoin trading.
Returning to the first point: “Establish Your Risk Per Trade,”—you need to adjust your investment amount (position size) so that the losses you incur after hitting the stop loss are proportional to your risk per trade. This is after you’ve entered your entry and stopped loss levels in the leverage calculator. The point of liquidation should also be considered. Think twice about changing your trade parameters if your position hits a liquidation point before a stop loss.
It would be best to avoid being liquidated at all costs because it will likely result in further expenses. If you put stop-limit orders before your liquidation price soon, you can close your trade independently instead of being liquidated.
What is Margin Trading?
Buying something on credit is a good analogy for margin trading. Borrowing assets from a broker allows you to engage in trading. The practice of trading on margin is known as leverage since it entails borrowing money to increase profits.
Margin and leverage trading are different concepts, although they share some similarities. Margin trading allows you to borrow more money from the cryptocurrency exchange with the money you already have in your account as security. However, by utilizing leverage trading, you can augment the magnitude of your trading position by obtaining additional credit from the platform.
In a secured loan, like margin capital, the interest rate and collateral requirements are decided by your exchange. The amount you borrow and the balance in your account are two other key factors that determine your interest rate. To protect yourself from potential losses while trading with leverage, you need to have a specific amount of money in your account, known as a maintenance margin. In addition, you’ll have to put down some cash as collateral to ensure that the assets you borrow are safe.
Leveraged transactions sometimes involve perpetual contracts based on financing rather than interest rates. If you want to leverage your asset trades without worrying about when they will expire, you can use a perpetual contract, a type of futures contract. The funding rate is a critical component of perpetuals’ pricing, controlled by the underlying spot market.
The funding rates are the dividends made to investors periodically, based on the differential between the perpetual contract markets and spot prices. The pricing of the perpetual contract remains highly tied to its underlying spot market price due to the financing rate. So, when more traders long on the perpetual contract, the price disparity between the contract and the underlying spot price widens, and the funding rate becomes positive and grows more significant. When this happens, long-term traders will have to pay off short-term traders. The result should be a return to the underlying spot value of prices as more traders opt to short the market.
When a trader’s initial margin is wholly or partially depleted, they must close their position and liquidate. This is common when traders lack the capital necessary to maintain their positions.
Calculating Leverage
Here is the formula for calculating leverage in crypto:
Leverage = 1/(Margin) = 100/(Margin percentage)
Assuming the margin is 0.04, then the margin percentage is 4%
Leverage is 1/0.04 = 25
To find the margin used, multiply your trade size by the margin percentage.
Calculating Liquidation Price
The value of your leveraged position upon liquidation should be known as well. You should be familiar with its calculation even though exchanges always provide you with the liquidation price.
To find the liquidation price, subtract the entry price from the leverage ratio and multiply the result by the entry price. Using a $1,000 starting point and leverage of 10x, the resulting liquidation price would be:
900 dollars ($1000 – (1/10) * $1000)
You can also think of it as the percentage change in price that will affect your liquidation price, which is one plus your leverage ratio. With leverage of 10x, a 10% move in the opposite direction would cause you to liquidate your investment, as 1/10 is 10%. Remember that cross-margin uses a separate calculation that only applies to isolated margins.
Platforms for Leverage Crypto Trading
When it comes to trading cryptocurrencies with leverage, these are a few of the top exchanges:
Binance
Based on the number of transactions, Binance is the best cryptocurrency exchange. Binance began to add support for leverage crypto trading in 2019, expanding its offerings beyond spot trading. You can’t use Binance’s leverage trading unless you’re not a US citizen and you pass the KYC identification process. Binance’s leverages vary from coin to coin and might reach 20x. Your margin account balance and the collateral you choose to secure a loan will determine the interest rate you pay. You can save 5% when you pay your interest rates with BNB.
Also, Binance has established a Margin Insurance Fund to ensure its liquidity. If you declare bankruptcy while engaging in leverage trading and do not have enough money to pay off your debts, the platform will use the insurance funds.
Kraken
Kraken is a cryptocurrency exchange that facilitates leverage trading for traders based in the United States. It has been running since 2014 and has a daily transaction volume that ranks among the top exchanges.
Kraken provides leverage of up to 3x in response to the strict US regulations. Even if this leverage doesn’t appear reasonable compared to Binance, it’s perfect for now. It will undoubtedly improve when the US establishes a more transparent structure for crypto regulation.
Kraken allows users to open long—and short-leverage trading positions for various cryptocurrencies, including Bitcoin, Ethereum, Ripple, Bitcoin Cash, and more. Because the exchange is always looking for ways to improve its customer service, it will point you in the right direction as you proceed.
Conclusion
Use cryptocurrency trading, enabling you to transact with more capital than you possess. It enhances your ability to purchase and sell. However, a substantial danger of liquidation is associated with heavy leverage and the highly volatile crypto market. Hence, trade cautiously and perform a complete technical analysis of an asset before using it. Never put more money on the line than you can comfortably lose.
Leverage trading is a hazardous investing method that crypto newbies should avoid at all costs. Otherwise, with good management, expert traders can maximize their trading earnings using leverage.
