Leverage Trading Cryptocurrencies

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Leverage Trading Cryptocurrencies

Currency fluctuations depend on numerous factors including geopolitical events, economic indicator announcements and news. If you are a greenhorn, you could be wondering about leverage trading cryptocurrencies. Our article explores the subject; offers a detailed overview to leverage trading, its pros and cons and potential applications.   

What is Leverage in Trading Cryptos?

Leverage is a tool in CFD trading that enables you to control a more significant market share with a smaller deposit than in a conventional setup. Leverage refers to the ratio of the amount of capital you can use in a transaction. 

The relatively small deposit you must place so you can trade is what is called a margin. Compare leverage to a loan. You use your $1000 and get a ‘loan’ equal to $100 for each dollar giving you $100,000 for your trade. Once you are through trading, repay the ‘loan’ and keep your profit.   

How Does Leverage Work?

Leverage is a double-edged sword that should be handled with correct swordsmanship. It increases your lot size; you deposit a small amount and get the power to trade a significant amount.

For instance, the standard in forex trade is 100, 0000 currency units. For this size of trade, you can get a leverage of 50:1, 100:1 or 200:1. If you want to trade currency worth $100, 000 with a 1% margin, your margin account should have at least $1000. 

Margin is a deposit of good faith that you place with a broker before you can trade. The broker loans you the additional amount, which is called leverage. The money collateralizes the loan in your margin account, and you pay it back with an interest.

Leveraged vs Unleveraged

Let’s say you engage a broker who needs 2% margin for a 50:1 leverage trade; you should have 2% of that trade size so you can open the position. This means you need at least $1000 in your account to open a USD 50,000 worth of BTC. 

Unleveraged Trading: You buy $50,000 worth of Bitcoin at $7,070 per BTC which you resell at $7,870; you should the $50,000 to make the $5,657 profit. 

Leveraged Trading: You can make the same profit with $1000 in your account if you engage a broker offering 1:50 leverage. That is how to leverage trading cryptocurrencies.

Common Leveraged Products

Leveraged products are financial instruments that facilitate traders to an advantaged market position without increasing their investment. These financial tools enable you to take a higher position than your initial investment. 

Different kinds of leveraged products work in different ways, but the bottom line is that they amplify your potential for profit and loss. The requirement with all leveraged products is the payment of an initial portion called a margin. Some examples of leveraged products include: 

  • Indices: Indices represent the performance of groups of assets in a selected exchange, sector, region or area. An index isn’t a physical product and is traded via products like CFDs and ETFs that reflect price movements.
  • The contract for Differences (CFD): CFDs enable you to profit from a price movement without owning an underlying asset. The security is calculated using the asset’s movement, starting from the trade entry to its exit. The trade is accomplished without using forex, stocks or futures exchange.  
  • Cryptocurrencies: You can trade digital currencies like you do forex but without government or bank involvement. Bitcoin and Ethereum are the most commonly traded cryptocurrencies.
  • Forex: Foreign exchange, the leading global financial market, involves the trading of different currencies to make a profit. The small movements involved make leverage trading popular.
Leverage Trading

Why Use Leverage When Trading Cryptocurrencies

Leverage trading cryptos give you a straight substitute to the dollar for dollar investment. Leverage has the power to blow up your transaction size to the highest possible levels. The result is higher profits from a relatively small investment. Leverage enables you to mimic the effect of risking more capital, thereby delivering a host of benefits and advantages. You only need to learn the art of taming the ogre that leverage can become.

Some key advantages of leverage that make it worthwhile include: 

24-Hour Dealing

Cryptocurrency, index and forex trading are global and, there’s always an open market somewhere in the world. Trading hours are open at different times in different markets; leverage enables you to have a say in any open market around the clock, five days a week. 

Freeing Up Capital

Financial leverage enables you to earn a profit from assets you wouldn’t be able to afford. This tool multiplies the value of every single dollar of your own money. With leverage, your cash is available for other essential uses. This tool enables you to generate a higher profit than the cost of the debt. 

Benefit From Various Markets

The use of leverage in trading will enable you to venture into markets that you would not otherwise avail. You will trade bigger contracts whether you are doing shares, forex or cryptocurrency trading, something you would not ordinarily afford. The best thing about leverage is that it doesn’t necessarily enhance the risk in trading as it remains the same as when using your cash. 

Magnified Profits

Leverage enables you to make more profits from smaller efforts. Whether you are staking a small or significant amount; leverage increases your profit margin from every single transaction by multiplying your stakes. You would need larger capital investment to achieve the same effect. Leverage places you a step ahead by artificially boosting your capital several hundreds of times. 

Cheap Instruments

The ability to leverage your capital requires a vastly reduced margin of up to 2% compared to minimums of 50% in traditional markets. The big difference frees you up to affordably take positions in different markets, way above your available capital resources, boosting your purchasing power and enhancing your returns.  

Potential Drawbacks When Trading With Leverage

Without leverage many CFD traders would vacate the field for only high-net-worth individuals. However, some potential drawbacks include:  

Magnified Losses

While working with leverage brokers enhances your chances of reaping more significant profits; it’s also a recipe for heavier losses. Those attractive profits can become smaller, while smaller losses can quickly become magnified. You must remain vigilant when leveraging to press the stop button as soon as the trend starts moving south. 

No Asset Ownership

Leverage steadily builds up your debt portfolio, which you must face at the end of the day. You are obliged to refund the principal amount together with some additional costs, whether or not you made a profit. Failure to repay the leverage knocks you out of business immediately.  

Margin Calls

There’s the ever-present risk of falling below the pre-agreed margin requirement with your broker. Failure to maintain the required transaction size and falling below the threshold can give your broker a reason to instigate a margin call and the immediate liquidation of your portfolio. The result is an early closure of positions that could have delivered a vast profit.   

Charges

Leverage-supported trades cost higher compared to unleveraged ones. All monies borrowed from a leverage broker must be repaid with interest. The more significant your leverage, the bigger the interest you accrue. The more leverage you include in a trade, the higher the commission your broker will charge. 

What is overleveraged?

To be overleveraged means that the trader has entered a position with too much debt that now he struggles to repay it. Ultimately, it’s about the risk and how much one can take on. When managing an overleveraged position, the best way is to close the position entirely and cash-out. Hence, leverage trading cryptocurrencies requires some skills and expertise. If risk is not managed wisely, it’s always best to start out by matching trade size with ones account size and once becoming more experienced, leverage trading cryptocurrencies can be taken on.

Bitcoin Leverage Trading

Bitcoin trading involves buying low and selling high; traders study the industry and try to predict price movements. Bitcoin leverage trading is a profitable but chancy trading strategy where you borrow capital at a high-interest rate to increase your leverage. When things go as expected, you can amass huge profits, but a wrong move can break you and leave you battling with huge margin calls, interest rates and order liquidation. 

Some exchanges offer 1:1 leverage enabling you to borrow up to 100% of your holdings. This means if you have one bitcoin, you can effectively trade like you had two bitcoins, thereby increasing your profit potential. Exchanges are offering 2.5:1, 3.3:1, 20:1, and up to 100:1 margins. It is essential to practice prudent risk management so you can avoid losing your entire bankroll in a few trades. Cautious traders can easily make more profits by leveraging capital as opposed to using personal funds. 

Bitcoin Trading Platforms with High Leverage

PrimeXBT

PrimeXBT is a leading leverage trading platform that offers a wide range of cryptocurrencies like BTC, ETH, LTC, EOS and XRP. The platform provides high leverage of up to 100x and low fees. 

Kraken

Kraken is a leading cryptocurrency exchange with a reputation of being secure as it’s never been hacked. The only downside with this leverage trading platform is its performance, offering measly 5 x leverage.  

Binance

Binance offers a wide range of assets and primarily focusses on crypto trading. You must have crypto to be able to trade here. Using the exchange’s native token BNB reduces the fees paid. Binance has among the highest fees charged. 

Concluding Thoughts

Leverage trading for crypto assets can be a richly rewarding enterprise. Cryptocurrency volatility increases your chances of making bigger profits than a trader who trades currency pairs. Remember that volatility is a double-edged sword, much more when you combine it with leverage. 

Always remember to keep a lid on your risks when leveraging as a guarantee for long-term success. Crypto trading with or without leverage can be very profitable. Up your game by reading guides like this. The bottom line is leverage offers you new possibilities enabling you to trade safely and conveniently.   

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