What Is Leverage in Crypto Trading?

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Leverage is the practise of trading cryptocurrency with borrowed funds. With leveraged trading, you can purchase or sell more for the same amount of capital. You can use your collateral to make leveraged transactions even if you start with a relatively small amount of funds. While using leverage can greatly increase your earning potential, it also exposes you to far greater danger, which is especially true in the highly speculative cryptocurrency market. Take caution when trading cryptocurrencies using leverage. If the market goes against your bet, you could incur significant losses.

Trading with leverage might be difficult for newcomers. However, it is essential to learn what leverage is and how it functions before attempting to use it. While the focus of this essay will be on leveraged trading in the cryptocurrency markets, most of the information is equally applicable to more conventional markets.

What is leverage in crypto trading?

Leverage is the practise of trading cryptocurrencies or other financial assets with borrowed money. Your ability to make a purchase or sale is increased, giving you access to more funds beyond those at your disposal. You may be able to borrow up to 100 times your account balance from some cryptocurrency exchanges.

Leverage is measured in terms of a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x). It displays the multiples of one's initial investment. Let's say you want to start a bitcoin position worth $1,000, but you only have $100 in your exchange account (BTC). Because of the leverage, your one hundred dollars will be worth one thousand.

Leverage can be used to trade numerous crypto-derivatives. Margin trading, leveraged tokens, and futures contracts are typical examples of leveraged trading.

How does leveraged trading work?

You need to fund your trading account before you can use leverage to borrow money and make trades. Collateral consists of the initial deposit you make into our account. Collateral needs to be proportional to both the amount of leverage and the entire value of the position being opened (known as margin).

Assume you have $1,000 and want to invest it in Ethereum (ETH) with a 10x leverage.If you want to borrow $1,000, for example, and the margin is 10%, or $100, then you'll need to have $100 in your margin account. With a 20x leverage (1/20 of $1,000 is $50), your margin call would be significantly lower.But remember that larger levels of leverage come with greater chances of insolvency and liquidation.

You'll need to keep a certain amount of your original margin deposit plus additional margin at all times in order to make trades. As soon as the market goes against you and your margin falls below the maintenance requirement, your account will be liquidated unless you deposit more money. The cutoff is the same thing as the safety margin.

Both long and short positions can benefit from using leverage. When you open a long position, you are betting that the value of the underlying asset will increase. In contrast, betting for a decline in the asset's value by placing a short position This may sound like standard spot trading, but when you use leverage, you are actually buying or selling assets based on your collateral rather than the actual value of the assets you possess. If you believe the market will fall, you can open a short position even if you don't own the asset you're shorting.

An example of a leveraged long position

Assume you want to open a long position in bitcoin worth $10,000 with a 10x leverage.In other words, you'll put up $1,000 in collateral. A 20% increase in Bitcoin's price would result in a net profit of $2,000 (after fees), significantly more than the $200 you could have made without utilising leverage if you had invested only $1,000.

But if the Bitcoin price declines by 20%, you would lose $2,000 on your investment. If the value of your initial investment (collateral) of $1,000 drops by 20%, you will be forced to sell (your balance goes to zero). Even a 10% loss in the market could be enough to cause liquidation. The precise value at liquidation will vary depending on the trading platform used.

You need more money in your wallet as collateral if you want to avoid getting liquidated. Before a liquidation occurs, the exchange will often issue a margin call (e.g., an email telling you to add more funds).

An example of a leveraged short position

Assume for a moment that you want to open a $10,000 short position on BTC with a 10x leverage.In this situation, you will borrow bitcoin from another person and sell it at the current price. You have only put up $1,000 in collateral, but thanks to 10x leverage, you can make a $10,000 Bitcoin sale.

You leased 0.25 BTC and sold it for $40,000, assuming the current BTC price. With merely $8,000, you can repurchase 0.25 BTC if the price of Bitcoin declines by 20% to $32,000. That's a $2,000 gain after expenses! (minus fees).

If Bitcoin's price increases by 20%, to $48,000, you will need an additional $2,000 to repurchase the 0.25 BTC. Given that you only have $1,000 in your account, your position will be closed. Again, you can avoid liquidation by increasing your collateral by adding additional money to your wallet before the liquidation price is reached.

Why use leverage to trade crypto?

Leverage is used by traders to increase the size of their positions and the amount of money they may make. In contrast, the potential for substantially larger losses inherent in leveraged trading was shown in the aforementioned examples.

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 while posting less collateral, they may, for instance, deploy 4x leverage across multiple exchanges rather than 2x leverage on a single one. This would free up some of their capital for use in other endeavours (such as investing in NFTs, trading in other assets, staking, or providing liquidity to decentralised exchanges).

How do you manage risks with leveraged trading?

Leveraged trading reduces the initial cash needed to enter the market but raises the probability of eventual bankruptcy. Even a small change in price can have a catastrophic effect on your portfolio if your leverage is excessive. If you have a low volatility tolerance already, increasing your leverage will make that worse. If you use less leverage, you have more room for error when trading. For this reason, Binance and other cryptocurrency exchanges have capped the amount of leverage that new customers can utilise.

Stop-loss and take-profit orders are examples of risk management strategies that can be used in leveraged trading to reduce exposure to loss. Whenever the market goes against you, stop-loss orders can close your position instantly at a predetermined price. The use of stop-loss orders helps prevent catastrophic losses. In contrast, take-profit orders terminate trading automatically whenever your profit reaches a certain threshold. That way, you can lock in your profits before the market takes a downturn.

You should now see that leverage in trading is a double-edged sword that can greatly increase your profits or losses. It's risky business, especially given the unpredictability of the bitcoin market. If you trade on Binance, we expect you to operate in a responsible manner and take responsibility for your decisions. To assist you in staying in charge of your transactions, we include features like a cooling-off period and a notice to prevent you from becoming addicted to trading. Use extreme caution at all times, and don't forget to do your own research (DYOR) to learn about the proper use of leverage and the development of trading techniques.

How to use margin trading on Binance

Cryptocurrency exchanges such as Binance allow traders to take advantage of leverage to increase their trading potential when transacting in digital currency. We'll walk you through the basics of margin trading, but the idea of leverage is applicable to other markets as well. Obtaining a margin account is a prerequisite to proceeding. If you haven't already done so, please read our Frequently Asked Questions post.

1. To check your margin, first select [Trade] > [Margin] from the menu bar.

2. Look for the pair you want to trade by clicking [BTC/USDT]. Our currency pair will be Binance Coin (BNB) to US Dollar (USDT).

3. You have to add some money to your margin wallet. Below the candlestick graph, select [Transfer Collaterals].

4. Choose the receiving wallet, the receiving margin account, and the cryptocurrency to send. Simply enter the total and press [Confirm].Here, we'll show you how to send 100 USDT to the Cross Margin account.

5. Click the right-hand box and continue. Decide between [Cross 3x] and [Isolated 10x]. When using Cross Margin mode, your margin accounts' margin balances will be pooled together, while in Isolated Margin mode, your margin balances will remain separate. This Frequently Asked Questions page has additional information on the distinction between the two.

6. Choose [Buy] (long) or [Sell] (short) and an order type, such as a market order. When you press [Borrow], you'll see that the one hundred USDT we deposited into the Cross Margin account has been multiplied by three, turning into three hundred USDT.

7. If you want to acquire Binance Coins (BNB) using a loan, you can do so by multiplying your USDT deposit by [Total] and your desired BNB purchase by [Amount]. A percentage of your available balance can also be used by dragging the bar below. The loan amount for this investment will then be displayed. Just open the position by clicking [Margin Buy BNB].

Keep in mind that you can't invest the full amount you have because of the trading cost. The system will automatically maintain the trading charge amount depending on your VIP status.

Conclusion

Utilizing leverage makes it possible to get your feet wet with a smaller outlay of capital and the expectation of larger returns in the future. The rapid liquidation of assets is still a risk when using 100x leverage to trade, especially if the market is volatile. Always trade with prudence and analyse the risks before taking on leveraged trading. Never trade with money you can't afford to lose, especially if you're using leverage.

FAQs

Explain what a leverage of 10 means.

A ratio, such as 1:10 (10x) or 1:20 (20x), expresses how much leverage you have (20x). It shows how many times your initial investment is compounded. For instance, with a leverage ratio of 1:10, you would only need $1,000 to invest $10,000.

What leverage should I use in crypto?

Swing traders often hold onto their positions for several days, if not weeks. Therefore, it is crucial to keep leverage low to prevent inadvertent liquidation from everyday market liquidity. Daily fluctuations of 5–10% in cryptocurrency markets are to be expected.

Does crypto favour leverage?

To a large extent, the crypto sector makes use of leverage. Leverage can boost gains, but it also magnifies losses. Trading cryptocurrencies using borrowed money (sometimes known as "leveraged trading") entails high levels of risk. It's mainly because the market is so unpredictable.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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External Links

• Leverage Trading in Crypto: A Beginner's Guide

• Leverage trading in crypto, a guide for beginners

• What is Leverage in Crypto Trading

• How Does Leverage Trading In Crypto Work In The High Yielding Market?

• What Is Leverage in Crypto Trading? (A Simple Explanation)

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