Leverage Crypto Trading: How Does It Work?

So, some traders may run out of funds simply by opening too many positions that they can’t pay to keep running. The easiest way to describe crypto leverage trading and long positions is to begin with a concrete example. Let’s say that you open a long position on Bitcoin for $10,000 with 10x leverage. While trading crypto futures can be highly rewarding because of the high leverage offered, the losses can be equally huge and sometimes bigger than the collateral.

When you pay your interest rates using BNB, you’ll receive a 5% discount. From the illustration above, it’s evident you can leverage to obtain a significant amount more exposure of an asset with minimal capital in your trading account. This article will focus on leverage trading in crypto markets, though a great portion of the information is also valid for traditional markets. Stop-loss is a risk-management tool that closes your trade at a specific amount if the market moves in an unfavorable direction.

How to pick the best crypto exchange for yourself?

Learn this and more about the top crypto ETFs & ETPs in the world. Depending on your coin pairing, Binance leverages differ and can be up to 20x. Interest rates also vary based on your margin account level and the type of asset you borrow.

In this regard, it’s advisable to only risk 2% of your trading amount per trade. In other words, after establishing your stop loss, you should set the amount of money you lose after your trade hits a stop loss to 2% of the trade. For instance, if you were leverage trading with BNB worth $20,000, then 2% risk implies adjusting your trading size so that you lose $400 after hitting your stop loss. Leverage trading is ​​a double-edged sword that can exponentially amplify both your gains and losses. It involves a high level of risk, especially in the volatile cryptocurrency market. As such, Binance encourages users to trade responsibly by taking accountability for their actions.

Leverage Magnifies Your Profits and Losses

Doing so can affect your emotions since you do not want to lose your whole portfolio. For this reason, it is better to keep a separate account for leveraged trading by allocating a certain amount of your capital to it. A stop-loss is a risk management strategy that is intended to automatically cancel a position at a certain price. Because it places a strict limit on how much you can lose, it is an effective way to safeguard yourself from damaging losses.

• The additional margin trading may negatively affect the return on your original investment.
• With more than 10 million users and over 6 billion in daily trading volume, KuCoin is rightly in the top 5 crypto exchanges in the world.
• Ultimately, all you have to do is to press the button on the platform when you’re ready to exit from the position.
• For instance, instead of holding a 2x leveraged position on a single exchange, they could use 4x leverage to maintain the same position size with lower collateral.

If you predict an asset’s price will increase, you can take a long position/buy. But if you strongly feel the price will decrease, you can open a short position/sell. Firstly, you must deposit assets into your cryptocurrency trading account to open a leveraged trade. The deposit acts as collateral and varies based on the leverage you choose and the total amount of the position or margin you want to open.

How Does Crypto Leverage Trading Work?

Below, we have detailed some basic information that you should have before embarking on your margin trading journey. Regardless if you’re trading crypto, stocks, commodities, gold, forex and what not, you should be highly informed before dipping your toes in. You can open long and short leverage trading positions for Bitcoin, Bitcoin Cash, Ripple, Ethereum, and more on Kraken. The exchange is proactive – in providing better customer support to its users; therefore, they will guide you accordingly on how to move along. Though 15% or 25% risk per trade is more profitable, you could easily blow up all your investment in less than five poor miscalculations. As such, the 2% risk per trade aims to leave you with substantial funds in your trading account even after incurring multiple consecutive losses.

The crypto’s volatility increases the chances of making more profits than you would get by trading currency pairs. However, volatility is a double-edged sword, especially when combined with high leverage. Bitcoin traders should, therefore, keep a lid on their risk at all times. Most of the failed leverage trades occur with inexperienced traders. If you’re new to crypto and to trading DO NOT attempt to use leverage. In order to properly work with a risky instrument such as leverage, one needs an intimate understanding of the mechanics and market dynamics.

Crypto leverage trading and long positions

If your trading plan goes as projected and you make a profit of $1,500, you will return the borrowed funds and interest to your broker and keep the balance. Crypto beginners are advised to keep off leverage trading as it’s a highly risky investment strategy. Otherwise, professional traders can use leverage to maximize trading profits if they properly manage it. A funding rate refers to intermittent payouts made to investors based on the difference between perpetual contract markets and spot prices.

• This indicates that the minimum deposit amount required is only $100, which will serve as collateral.
• The physicist has couple of years of professional experience as project manager and technological consultant.
• ” These are all great questions we will be covering below so that you don’t take any unnecessary risks.
• By using IP addresses from countries that are allowing trading with high leverage, the U.S. trader can use the restricted platform and make sure not to get caught.

Negative balance protection stops you from losing more money than what is in your account. The lending platform agrees to absorb the loss if your account’s equity goes negative as a result of the leverage. Mass adoption of cryptocurrencies has increased exponentially in 2021 and 2022. People have been captivated by the rise of decentralized finance (DeFi), non-fungible tokens (NFTs) and Bitcoin (BTC) setting new all-time highs. As of August 2021, the market cap of the entire crypto space sat at more than $2 trillion. A tsunami of trading volume attracted tons of day traders looking to use leverage to pursue maximum gains.

OmiseGo Price Prediction 2023 – 2025 – 2030 OMG Price Forecast

Many platforms will offer you the chance to use 100-to-1 leverage, but it’s not always the wise thing to do. To come back to the simple explanation, if you use leverage without any additional risk management, it does indeed amplify your position size, but the percentage of moves too. In spot trading, commission this risk does not exist, but you are limited to your capital alone. You may easily get started with less money upfront and witness the potential for greater returns thanks to leverage. However, using significant leverage might quickly result in liquidation due to leverage and market volatility.

• This amount represents the collateral for the loan from the broker.
• This fear has even led some traders to resort to borrowing funds from brokers to increase their buying power in hopes of amplifying gains.
• Because of the stringent US laws, Kraken offers up to 3x leverage.
• You must pass the Know Your Customer (KYC) identification process and be a non-US citizen to qualify for Binance’s leverage trading.

When trading with leverage, you can speculate product price movements which then inform your decision to either buy or sell. If you buy an asset because you believe the price would rise, this is termed ‘going long’ and when you sell it is called ‘going short’. In addition to margin deposits, you need to be aware of the broker’s margin threshold, also known as maintenance margin, which is – designed to keep your positions from being liquidated. If the margin falls below the maintenance threshold with price fluctuations, you will have to deposit extra funds into your account. To use your borrowed funds to trade, go to the Exchange page, select the ‘Margin’ tab, and you can start trading. How much are the asset sizes of the biggest crypto exchange-traded funds or products?

Shorting and Longing: What’s It To Do With Leverage Trading?

A trader using leverage can gain considerably by using a smaller amount of money to acquire assets with a higher potential return. If you are thinking of diversifying your portfolio into other crypto, but only have a small capital to do so, you can use margin trading to increase your buying power. Using margin trading to enter a hedged position against the crypto market can also help protect against major market downturns. Let’s assume you want to purchase ETH worth $2,500, but you only own $250 in your account. In this case, you can still achieve your dreams by using a leverage of 10x.

• Just as you can trade assets like Bitcoin, Ethereum, or Tether, you can also spot strange names in the market like 3X Short Ethereum – now you know what they are.
• Margin is the actual amount required to open a leveraged position.
• In other words, after establishing your stop loss, you should set the amount of money you lose after your trade hits a stop loss to 2% of the trade.
• Read our educative guide on the best leverage ratio for crypto beginners to learn more on this topic.
• However, traders must keep enough funds in their accounts as collateral for the lending platform.
• If the price of the asset that you are leveraged trading goes in the opposite direction, your margin will start to drop.

In fact, you could face liquidation even if the market only drops 10%. If you want to open a long position of $10,000 worth of BTC with 10x leverage, you will use $1,000 as collateral. Apart from the initial margin deposit, you must also maintain a margin threshold for your trades. It would be good to use a demo account first to become proficient with technical analysis and understand market trends. Gaining experience in predicting how much an asset is likely to move up or down and practicing using leverage increases your chances of successful trading. With hundreds of leverage trading platforms out there, it can be daunting to select the exchange for you.

Leverage

Moreover, you should only open trades with better risk/reward ratios based on your average win rate. For example, if you want to trade $500 in BTC with 2x leverage, you must deposit minimum collateral of $250 in your account. In this regard, you should always remember that the more leverage you use, the higher returns you will generate but the higher losses you will incur if the trade goes against you.

• Trading with leverage is most practical for investors aware of the significant dangers involved.
• These are ERC20 tokens that have exposure up to 3x applied to the trading pair.
• It enables traders to control a larger amount of cryptocurrency with a smaller initial investment.
• You can’t control the amount of leverage you use if you don’t understand how it works.
• Regardless of the effectiveness of your approach, leverage trading can turn against you quite quickly, which is why you should never invest more funds than you can afford to lose.

As mentioned above, there is always the other side of leverage trading. The higher the leverage, the greater the probability of being liquidated. Therefore, you must preserve the monitoring of the margin status for your trades. Let’s first begin with the definition of cryptocurrency, how it works and how it is being traded on modern crypto platforms or exchanges.

Why Use Leverage to Trade Crypto?

One of the keys to becoming adept at leverage trading is knowing that it’s not always necessary to use leverage. Although leverage has been a leading financial asset instrument, knowing when to use it and how could save you valuable resources. Suppose you increase your knowledge of risk-management strategies and trading methods over time. In that case, you should become proficient with using leveraged trading successfully.

• Leverage uses borrowed capital to trade cryptocurrencies, increasing your buying power and allowing you to trade with more capital than you might have.
• Innovative concepts, such as leverage trading or crypto assets, are definitely attractive but are challenging, particularly for novices.
• The first option has grown in importance recently because it requires less financial investment and allows traders to bet on cryptocurrency price changes without directly purchasing them.
• Crypto beginners are advised to keep off leverage trading as it’s a highly risky investment strategy.

Leverage can help you make more profit in a shorter time than the average trader who is not using any leverage at all. In the hands of a skilled and risk-management-conscious trader, it could be a reasonable advantage. The same is very risky and can lead to significant losses and even the liquidation of an account for careless traders. Leverage trading in crypto starts with funding your trading account, and the initial capital you provide is called collateral. The required collateral varies depending on the leverage you choose and the total value of the position that you wish to open, which is called margin. Every trade can turn to a loss regardless of the success rate of your trading strategy.