The widespread use of cryptocurrencies skyrocketed in 2021. As a result, non-fungible tokens (NFTs), decentralized finance (DeFi), and Bitcoin (BTC) reached new all-time highs and became more popular.

The market capitalization of the crypto industry was also over $2 trillion as of August 2021. Many day traders were drawn to the high trading volume because they wanted to use leverage to maximize their profits.

Because of the massive trading volumes in the cryptocurrency market, some traders are afraid of missing out on potentially significant earnings from trading cryptocurrencies.

As a result, some people resorted to borrowing money from brokers in order to increase their purchasing power and maximize their returns. This is the essence of margin or leverage trading.

A margin is the amount of money the broker lends to the trader for trading digital assets.

There is a significant amount of risk associated with leveraged trading since it allows traders to trade with a lower investment while increasing both earnings and losses.

This article comprehensively explores what leverage trading means in crypto trading. The article also considers the risks and benefits of leverage trading in crypto.

What is Leverage in Crypto?

Whether in the crypto sector or not, leverage works similarly to a loan. In exchange for the collateral, the exchange lends the trader a larger position size. For instance, even with just $100 in a trader’s wallet as collateral, the trader can still trade with $1,000 in a particular asset. The collateral, in this case, is referred to as the margin. Leverage is always a multiple of the margin; it could be 2X, 5X, 10X, 15X, etc.

Let’s assume a trader chose a 15X leverage position (using $100 as the collateral or margin). In this case, the leveraged position would be $1,500. If the trader uses this leveraged position to buy Ether (ETH), he will make $150 in profit if the price of Ether rises by 1%. This 1% gain on the leveraged position is equivalent to a 10% gain on the margin.

Leverage trading is an excellent technique for making more money with less if the trader has analyzed all the chart patterns, and they all indicate a price rally. The trader’s position can be multiplied numerous times, increasing the potential earnings.

What is Leveraged Trading?

Leveraged trading is a type of cryptocurrency trading that can net the trader massive profits. It can also result in significant financial loss.

Traders must exercise caution when using this trading technique because they risk being liquidated if they do not use a stop-loss.

Leverage trading is a type of trading that involves borrowing money from the cryptocurrency exchange that the trader is using. Leverage trading is available on several platforms (more on this later in this article).

Traders can increase the amount invested by using leverage. Some cryptocurrency exchanges allow traders to trade up to 100 times the amount they deposit in their trading account.

Although leveraged trading has numerous advantages, the risks can be enormous. It is not a good idea for beginners to try leverage trading, and it should never be conducted by someone inexperienced.

One significant advantage of leveraged trading is that you can profit in both bull and bear markets as long as you trade in the market’s direction.

The trader will profit if they short the market while it is falling; this implies that the trader believes the market will decline.

Furthermore, the trader will profit if they go long while the market pumps (meaning the trader bets the market will rise).

How Does Leveraged Trading Work?

The first step in cryptocurrency leverage trading is to fund a trading account. As previously stated, the trader’s collateral is the initial capital deposit. The amount of collateral required varies depending on how much leverage the trader employs and how much margin the trader wishes to borrow.

For example, if a trader wants to invest $100 in ETH using 10x leverage, a margin of $10 would be required in the trader’s account. It should be noted that using more leverage increases the likelihood of both making and losing money.

Aside from the initial capital deposit, the trader must keep the transactions within a certain margin threshold. If the market moves against the trader’s analysis and the margin falls below the maintenance barrier, more money must be deposited into the trading account to keep the positions from being liquidated. Leverage is available for both long and short positions.

Risks Associated With Leveraged Trading

Leverage can be a very effective strategy for increasing one’s income. It is, however, a super-fast and effective way to lose money if the market goes against the trader’s analysis.

The cryptocurrency market is highly volatile, making it extremely dangerous for traders who do not fully understand the complexities of using high leverage. If the trader’s position fell too far, some exchanges would sell it. This is referred to as an “automatic stop-loss,” and when it is activated, it closes the trader’s position.

Also, the leverage provider may charge an “overnight fee”—a specified percentage of the entire value of the trader’s equity for each night the trade is open. This is not a problem for transactions that last less than a day, but if the trader intends to hold leveraged positions for an extended period, this could have a significant impact on profits if not taken into account.

Benefits of Leveraged Trading

Traders who use leverage effectively and accurately assess ratios have a better chance of making large profits. Obtaining such massive returns with unleveraged margins may require significant time and effort.

Leveraged trading helps savvy traders maximize their time while multiplying their portfolios’ values.

Leveraged trading may depend on local regulations, especially in terms of the amount invested. It is best to confirm the regulatory status of any broker or platform you use. In some jurisdictions, traders who use leverage could end up with a negative balance and be required to repay the broker or platform for that loan.

Platforms that Provide Leveraged Trading

This section explores the most popular cryptocurrency leverage trading platforms for buying and selling online assets. This evaluation is based on several factors, such as features, use, leverage ratio, costs, and customer service.

Binance

Binance has witnessed tremendous growth since its inception in 2017. It is currently the largest cryptocurrency exchange marketplace in the world, with 1.4 million transactions per second. Binance leverage trading is available on iOS and Android mobile devices.

Because of its user-friendly interface and smooth operation, it is the most popular trading software. The app provides traders with access to trade history as well as profit and loss information. However, in order to comply with regulatory requirements, the user’s home country must not be on Binance’s list of prohibited countries.

ByBit

ByBit was founded in 2018 and is focused on trading derivatives (long and short coins). It is based in Singapore and has over 2 million active users. Binance futures and ByBit are the best exchange platforms for margin trading because they have the most liquidity. Also, beginners can easily use the ByBit mobile app due to its user-friendly interface and ability to use insurance funds to recover losses in the event of bankruptcy.

FTX

FTX is the go-to place for traders looking for a cutting-edge cryptocurrency trading platform. The platform, which was established in 2019, offers its members an excellent level of liquidity and insurance. US residents can only use FTX.US because FTX is not fully available to US residents. With its three-tier liquidity regulation, FTX allows a variety of marginal tokens. Traders must stay updated on all borrowing rates because they typically change every hour.

In Conclusion,

As Bitcoin and other cryptocurrencies have grown in popularity, so have various crypto trading methods. Leverage trading is one of those trading methods that, despite being widely used and occasionally extremely profitable, can also be extremely risky, causing traders to liquidate their positions in a matter of seconds.
It is essential to understand liquidation and how to prevent it. Leverage trading is not recommended for novices; only experienced and skilled traders should try it. Hence, traders who want to trade using leverage should ensure they understand how it works, lower their risks, and never invest more money than they can afford to lose.

Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.

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