CRYPTOCURRENCY LEVERAGE EXPLAINED IN DETAIL
Many cryptocurrencies among Bitcoin are famous for the volatility and you can see their prices to fluctuate substantially in a short period. By taking its advantage, if you want to turn a bear market which is falling into an opportunity to earn a profit, you may consider leverage trading.
Why Trade with Leverage?
Trading with leverage allows you to amplify your profits from market swings by letting you execute more complex and active trading strategies. With the powerful and advanced trading engines of popular exchanges, traders can use leverage to go long or short on various cryptocurrencies by up to 100x. It means that you will have a hundred times the earning potential than a regular spot trade.
What is Cryptocurrency Leverage Trading?
Also known as margin trading, cryptocurrency leverage trading refers to trading by borrowing funds to increase potential returns while buying and selling cryptocurrency. When traders leverage trades, they can access amplified buying power which allows them to open positions much larger than their actual account balance.
For example, if a trader has an account balance of 5 BTC but they want to open a position worth of 50 BTC, he can do it by placing a trade with leverage of 10:1. So, by using leverage of 10:1, you can access 10 times the profits if the market moves in your favor. However, keep in mind that leverage also has the effect of magnifying losses if the market moves against you. Leverage trading is speculative, risky, and complicated. So, it is not suitable for beginners. It is best to use leverage when you are experienced enough in trading.
How does Cryptocurrency Leverage Trading work?
Different exchanges impose various limits on the amount of leverage available. Some of them offer up to 100:1 and some offer even 500:1. The amount of leverage you are allowed to access also depends on the initial margin and the maintenance margin. The initial margin is the amount of BTC you have to deposit in order to open a position. The maintenance margin refers to the amount of BTS that must be held by you in your account in order to keep a position open.
You have two options in cryptocurrency leverage trading, such as:
- Going long - You may open a long position that involves buying a contract as you think that it will increase in value.
- Going short - Going short refers to selling a contract because you believe that its price will go down. After that, you can buy it back at a reduced price on a later date.
When a trader opens a position, a portion of your account balance is held as collateral for the funds borrowed by you from the exchange. If you conduct a successful trade and close the position with a profit, the collateral is returned to you with those profits minus any fees. However, if the market moves against you and you encounter a loss, the trade will close the position automatically and you collateral will be liquidated when the market reaches a certain price which is known as the liquidation price.
Leverage and Risk Management Strategy
Although leverage trading intensifies profits, it is complicated and risky. So, before you start trading with leverage, keep these simple tips in mind in order to reduce your risks
1. Pick a market
Instead of trading across several markets, it is better to concentrate on one particular market. It will help you to develop a better understanding of trends and price movements.
2. A small initial amount
When you start out with leverage trading first, you should deposit a small amount only into your account. This way, you will not lose much if the market moves against you or you make a mistake in placing a trade.
3. Use limit trades instead of market trades
While trading BTC, a taker fee is charged by exchanges. For example, BitMEX charges 0.075% of the total position if the user uses the “Market” tab while opening a position. However, if the user selects the “Limit” tab in order to become a market maker, they will receive a rebate of 0.025% of their total position.
4. Understand your order
It is crucial to study and understand the order screen while setting up your first few trades. You must pay attention to cost particularly because it shows the maximum amount you may lose from the trade.
5. Limit your leverage
It is always a wise decision to practice before you get into real-time leverage trading. BitMEX provides a practice environment to experience a set up exactly like the real thing. It will allow you to get familiar with placing, executing, and canceling orders when you are interacting with a simulated marketplace.
7. Don’t do it if you are not experienced
If you are a beginner to online trading or cryptocurrencies, leverage trading is too risky for you. So, you may want to leave it until you gather enough knowledge and experience.
What is the best Leverage Ratio for a Beginner?
First of all, leverage is not good for beginners at all. It indeed increases your profit level and allows you to trade a higher amount than you can invest, but it also increases the potential loss at the same time if the market moves against your favor. So, even if you are attracted to the leverage trading strategy to make more money in a short period, refrain yourself. First, you need to understand the concepts directly related to money management in leveraged trading, such as margin, balance and equity of your account, account level, free margin, margin call and stop out.
Once you gather enough knowledge about the concepts mentioned above along with experience in trading, you can start leverage trading. For a beginner, the ideal start is to use 10:1 leverage with $10,000 balance. So, the ratio of leverageshould not go higher than 10x if you are a beginner.
Where to Trade Crypto with Leverage?
Executing crypto trading is very simple on IQ Option. You can follow these steps
- Open the crypto chart of your choice by clicking the plus button on the trading platform.
- Now, select your investment amount, take profit, entry price, stop loss, and leverage.
- Lastly, click the green “Buy” button for a long position and the red “Sell” button for a short position.
IQ Option offers a user-friendly platform with powerful and useful features that help traders to conduct crypto leverage trading easily and safely.
Benefits of Crypto Leverage Trading
- Profiting in falling markets
One of the main benefits of leverage trading is that it allows traders to turn a bear (falling) market into a profitable opportunity effectively. For example, assume that you had 1 BTC on December 18, 2017, when its value was over $18,737. You expected the market to crash. Therefore, you sold that BYC at that high price point with the goal of purchasing it back later when it was at a much lower price. Now, after this, if you had decided to buy the BTC back on April 6, when its value was $6,695, you could have made a profit of $12,042.
When you use leverage trading with this, the potential profit can be much higher. For example, if you use leverage of 5:1, you can make a profit five times bigger. It is the potential for much larger profits that makes leverage trading an appealing prospect to experienced traders.
- Improving capital efficiency
Let’s assume that there is $1000 balance in your account. If you use a leverage of 100:1 with it, you will actually have $100,000 to manage. It means that you have the opportunity to open more trades in several trading instruments. At the same time, you can apply hedging techniques for extra protection against risks. It allows you to increase the chances of earning a profit, reduce risks, and diversify your portfolio.
- Low entry level
If you have $1,000 in your account, and you are not using leverage, then the best you can do is opening just one position with a minimum lot of 0.01. So, with a small amount and no leverage, you will not even have the opportunity to open a small position. However, with leverage, you can have the chance to access trades on a par with professionals even with a small deposit of $50 to $100.
- Favorable financial conditions
When brokers did not provide leverage before, the only way to trade with leverage was borrowing a very limited fund from the bank at a high interest rate and a huge collateral. Brokers offer large leverages to clients with a small amount of the deposit with minimal commissions. Using leverage is almost free if you trade intraday. If you want to carry the trade overnight, add swap with your cost. It is the overnight commission of the broker.
If you use leverage if 100x on a trade, it means that you will earn a profit of $100 for every $1 you have invested.
Although leverage increases potential profit level, it also multiplies the risks of losing money for the same reason. It is a risky and complicated method of trading that requires knowledge and experience. So, leverage is not a good option for beginners.
Yes, crypto can be purchased on margin.
Yes, you can lose more than you invest with leverage because it intensifies both profit level and risks of loss.