When crypto traders use leverage, they are maximizing their profits by borrowing funds to make trades. To put it another way, leverage is a way to amplify their buying and selling power. Therefore, traders can leverage their initial capital to make leveraged trades.
Don’t forget, however, that leverage in crypto markets comes with a lot of risk, as you know, they are very volatile and sometimes quite unpredictable.
Learn what crypto market leverage is first to better understand how it works.
It is risky to use leverage on its own.
- The concept of leverage in crypto trading refers to the use of borrowed funds to make trades, with the aim of making a larger profit.
- In general, the higher the leverage, the greater the risk of being liquidated.
- You should always consider both technical and fundamental aspects of your trade before deciding to use leverage in the crypto market.
What Does Leverage Crypto Mean?
As we discussed earlier, leverage refers to using lended money to trade cryptocurrencies to increase your buying or selling power so you can trade with more capital than you have in your wallet right now. Depending on the crypto exchange, you can have a leverage ratio of up to 1:100.
As an example, if you have $100 and want to open a position worth $1000, say in Bitcoin, you can do it with 1:10 leverage.
Cryptocurrency Leverage Trading: How Does It Work
The initial capital you provide to your crypto trading account is called collateral, and it will vary depending on the leverage you choose and the total value of the position you wish to open.
Cryptocurrency Leverage Trading Example
In this case, if you decide to invest $5,000 in Bitcoin with a 1:10 leverage ratio, your margin will be the 1/10th of $5000, which is $500 – as collateral for the loan. When leverage is 1:140, the required margin will be $5000/40, which is $125, for the same worth position ($5000).
You will need to maintain a margin threshold for your trades if you want to prevent getting liquidated. This was the best part. Now the fly in the ointment – the higher the leverage, the greater the risk of getting liquidated, so you have to maintain it. For example, if you decide to go long, but the market moves against you, and your margin falls below the maintenance threshold (also called the maintenance margin), your funds will be liquidated unless you add more funds to your account.
Obviously, leverage can be applied to both long and short positions. In case you aren’t aware, opening a long position means you expect the price of an asset to rise, while opening a short position means you expect the price of an asset to fall.
Bottom Line on What is Leverage in Crypto Trading
When you trade with leverage, you can get started with less capital and earn higher returns. However, leverage combined with market volatility can lead to a quick liquidation, especially if you use 1:100 leverage. Always trade with caution and assess risks before using leverage.
It is never a good idea to trade funds that you cannot afford to lose, especially when using leverage.
Once you learn how to manage leverage, you don’t have to be afraid of it. If you are a laissez-faire trader, you should not use leverage, otherwise leverage can be used successfully and profitably. Leverage is a sharp instrument you should handle carefully – once you learn how to use it, you won’t have any problems.
As a result of lower leverage applied to each trade, more breathing space can be achieved by setting a wider but sensible stop and avoiding a higher capital loss, since a high Leverage Crypto can quickly drain your trading account if it goes against you due to large lot sizes resulting in large losses. Each trader has the option of customizing the leverage according to their needs.