How Does Leverage Work in Crypto Trading?

2022/10/07By: C, Fiona

Leverage is the practice of utilizing borrowed funds to effect a financial transaction, and it is widely used in the cryptocurrency trading industry. With the help of leverage, you can trade larger sums without risking a disproportionately huge portion of your capital. So, you can leverage your transactions even with a modest starting money. Leveraged trading can increase your earnings, but it also comes with a significant degree of danger, especially in the unsteady cryptocurrency market. When trading cryptocurrency, use leverage with caution. If the market goes against your position, you could incur significant losses.

Trading with leverage might be difficult for newcomers. But before trying out leverage, it’s important to have a firm grasp on what it is and how it operates. The focus of this essay is on using leverage when trading on the cryptocurrency market, although much of the advice is applicable to more conventional markets as well.

 

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What is Leverage Crypto Trading?

Leverage is the practice of investing in cryptocurrencies or other financial assets with borrowed money. As a result, you can make larger purchases or sales without having to dig deeper into your pocket. You may be able to borrow as much as one hundred times your account balance from some cryptocurrency exchanges.

Leverage is measured in ratios such as 1:5 (5x), 1:10 (10x), and 1:20 (20x) (20x). That number is the multiple by which your initial investment has grown. Let’s say you wish to open a bitcoin position worth $1,000 but only have $100 in your exchange account (BTC). With a leverage of 10:1, your $100 will be equivalent to $1,000 in purchasing power.

Numerous crypto-based derivatives are available for leveraged trading. Margin trading, leveraged tokens, and futures contracts are all examples of a specialized form of leveraged trading.

 

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How Does Leverag Work inCrypto Trading?

You need to put money into your trading account before you can get a loan and use leverage. The collateral is the initial deposit you make. How much collateral is needed is proportional to the amount of leverage employed and the overall value of the position being opened (known as margin).

Let’s pretend you have $1,000 and wish to invest it in Ethereum (ETH) with a leverage of 10 times. A margin of 10% of $1,000 means you must have $100 in your trading account to secure the loan. Your margin call would be significantly lower with a 20x leverage (1/20 of $1,000 = $50). However, the bigger the leverage, the greater the possibility of insolvency.

A margin threshold must be maintained in addition to the initial margin deposit. If the market goes against you and your margin falls below the maintenance barrier, your account will be terminated until you deposit more money. The cut-off point is often referred to as the safety margin.

Long and short positions can both benefit from the use of leverage. When you open a long position, you are betting that the value of the underlying asset will increase. Conversely, if you open a short position, it indicates that you anticipate a decline in the asset’s value. This may sound similar to ordinary spot trading, but with leverage, you can actually buy or sell assets based on your collateral alone, rather than the actual assets you possess. If you believe the market will fall, you can open a short position without actually owning the asset you are selling.

 

A Leveraged Long Position Example

Consider that you wish to start a long position in Bitcoin worth $10,000 with a 10x leverage. This implies that you will put up $1,000 as security. You will make a net profit of $2,000 (after fees) if the price of bitcoin increases by 20%, which is far more than the $200 you would have made if you had traded your $1,000 in unleveraged transactions.

However, your stake would lose $2,000 if the price of BTC decreases by 20%. With merely $1,000 as your initial capital (collateral), a 20% decline would result in a liquidation (your balance goes to zero). In fact, even a 10% decline in the market could cause you to be liquidated. The exchange you are utilizing will determine the precise liquidation value.

You must put extra money in your wallet to raise your collateral if you want to avoid getting liquidated. The exchange will often notify you of a margin call before the liquidation occurs (e.g., an email telling you to add more funds).

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A Leveraged Short Position Example

Let’s say you want to start a $10,000 short bet on Bitcoin with a 10x leverage. In this scenario, you would borrow Bitcoin from someone else and then sell it for the going rate. You have a $1,000 deposit as collateral, but thanks to your 10x leverage, you can sell $10,000 worth of bitcoin.

You borrowed 0.25 BTC and sold it, assuming the price of Bitcoin at the time was $40,000. You can purchase 0.25 BTC back with only $8,000 if the price of Bitcoin falls by 20% (to $32,000). You would make a net profit of $2,000 as a result (minus fees).

To purchase back the 0.25 BTC, you would need an additional $2,000 if BTC rose 20% to $48,000. Since there is just $1,000 left on your account, your position will be liquidated. Once more, you need to enhance your collateral before the liquidation price is reached in order to prevent being liquidated.

 

Why Use Leverage in Crypto Trading?

As was previously indicated, leverage is used by traders to magnify their market exposure and profit potential. Yet the aforementioned instances also show that leveraged trading carries the risk of substantially larger losses.

Leverage is used by traders for a number of reasons, one of which is to increase the fluidity of their money. To keep the same size of position with less collateral, they may, for instance, utilize 4x leverage on two different exchanges instead of 2x leverage on a single one. This would free up some of their funds for use in other areas (such as investing in NFTs, trading in other assets, staking, or providing liquidity to decentralized exchanges).

 

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How to Control Risks When Trading with Leverage?

High-leverage trading may necessitate less initial money but raises the danger of insolvency. A 1% change in price could result in catastrophic losses if the investor’s leverage is large. High levels of leverage reduce an investor’s ability to withstand price swings. You’ll have greater room for mistake in your trades if you use less leverage. Since this is a problem, Binance and other cryptocurrency exchanges have capped the amount of leverage that new customers can employ.

Stop-loss and take-profit orders, among other risk management measures, can reduce exposure to loss in leveraged trading. Stop-loss orders allow you to automatically close your position at a predetermined price, which is very useful when the market moves against you. Protect yourself from catastrophic losses using stop-loss orders. Take-profit orders, on the other hand, close after your profits have reached a predetermined threshold. With this strategy, you may lock in your profits before a downturn in the market.

It should now be obvious to you that trading with leverage is risky since your profits or losses can quickly snowball out of all proportion. It’s fraught with peril, particularly in the speculative cryptocurrency market. Trading properly and accepting responsibility for your actions is something we stress here at Binance. To assist you stay in charge of your transactions, we include features like an anti-addiction notice and a cooling-off period option. You should always proceed with caution, and you shouldn’t forget to DYOR when it comes to learning about leverage and developing trading methods.

 

How to Trade Crypto with Leverge on BTCC?

On cryptocurrency exchanges like BTCC, you can trade cryptocurrencies using leverage. Leverage is a concept that may be found in different sorts of trading, and we’ll show you how to use it in margin trading. You’ll need a BTCC account and deposit crypto before we begin. If you haven’t, Check out the BTCC guide to open.

1. Register a BTCC account

2. Go to [Trade] – [USDT Contracts] from the top navigation bar. 

3. Search a crypto contract you want to trade. For example: BTC Weekly. 

4. Set crypto price alerts. Setting a price alert will inform you immediately when a cryptocurrency reaches a specific price so you won’t miss any trading opportunities.

5. Adjust your leverage when trading crypto.  Choose leverage amount (10x by default). Specify the amount of leverage by tapping on 10x and tap the leverage amount.

 

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Conclusion

If you want to get started quickly with a smaller initial investment and the possibility of bigger rewards, leverage is your best bet. In spite of this, if you’re using 100x leverage to trade, rapid liquidations could occur if leverage is mixed with market volatility. When considering the use of leverage in your trading, it is important to proceed with caution and carefully weigh the potential consequences. You should never use leverage if you are trading with money you can’t afford to lose.

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