Crypto Leverage Trading is the act of speculating on the price movements of cryptocurrencies via a
- Futures contract trading account, or
- A Spot/CFD trading account.
These two types of accounts can be found on any legit crypto trading exchange, and it offers users the ability to buy and sell crypto coins without the need to first posses the underlying crypto asset.
In this guide, we will be breaking down all you need to know about Crypto Leverage Trading as a beginner, how it works, the benefits, drawbacks and the best platforms you can utilize for leverage trading right now.
Total Beginner? Check out this article: What Is The Crypto Market and How Do I Get Started?
How Does Crypto Leverage Trading Work?
Leverage trading involves using borrowed capital, typically provided to you by a trading platform, to trade financial assets, including cryptocurrencies.
With this leverage, you now have greater buying or selling power by utilizing more capital than what you currently possess in your wallet.
However, it’s important to note that leverage trading also magnifies the potential risks and losses you could take. Therefore, you must carefully manage your positions and be aware of the associated risks before engaging in leverage trading.
The leverage amount is usually represented by a ratio, such as
- 1:5 (5x)
- 1:10 (10x)
- 1:20 (20x)
- Upto 1:100 (100x).
This ratios indicates how many times your starting capital is multiplied. For instance:
With an initial capital of $500 and a leverage ratio of 1:10,
Your $500 will become $5,000.
Leverage trading allows you to generate the same profit with significantly less initial capital.
($500 × 10 = $5,000)
How Can I Start Crypto Leverage Trading Right Now?
First off, you need to be signed up to a crypto exchange and have capital deposited in it. If you have no idea what a crypto exchange is,
check out this article: What Are Crypto Exchanges And How Do They Work? CEX vs DEX
- One of the best crypto exchange we recommend to our readers is Bitflex. They allow users crypto trade with no KYC needed.
Once you have your crypto exchange account created and funds deposited in your trading wallet, your initial capital is then taken to be the collateral for the leverage that you will be given to trade with.
For example,
If you want to trade $1000 worth of ETH with a 1:5 (5x) leverage, you need to deposit a minimum of $200 in your trading account.
Don’t fret, let me explain how we came about that.
Using the example above, you want to trade $1,000 in Ethereum (ETH) with a 5x leverage, the required margin would only be 1/5 of $1,000. This indicates that the minimum deposit amount required is only $200, which will serve as collateral.
Now, let’s say you use a higher leverage, say 10x, your required margin would be a lot smaller at $100 since it is equivalent to 1/10 of $1,000.
(1/10 × 1000)
Benefits of Crypto Leverage Trading
- Larger positions: Leverage trading enables you to trade with bigger positions than your initial capital, increasing your potential to get higher profits from small price movements.
- Higher returns: By using leverage trading, you can amplify your buying power, which may result in greater returns compared to trading without leverage. Controlling larger positions allows you to earn more significant profits from even small market movements.
- Efficient capital use: Leverage trading allows you to make the most of your capital. You can trade with a smaller cash balance while still having control over larger positions, freeing up funds for other investments or as a safety net against potential losses.
Keep in mind that leveraging comes with risks. Incorrect analysis can lead to swift reversals, so exercise caution and fully understand the downsides before utilizing leverage.
Check out this article: Step by Step Guide On Placing Your First Crypto Leverage Trade On Bybit
Drawbacks of Crypto Leverage Trading
Leverage is a double edge sword, and when you combine that with the massive volatility we see play out daily in the crypto market, we immediately begin to see the drawbacks and possible risks associated with being too aggressive on using leverage when crypto trading.
The negative drawbacks could include:
- Amplified losses: Even small market movements can greatly increase your losses, potentially wiping out your entire account balance.
- Interest charges on borrowed funds: When you trade with leverage, you are borrowing funds from your broker, which often comes with interest charges. These charges can add up over time and eat into your profits or increase your losses.
- Margin calls and liquidation: If the market moves against your position and your account falls below the required margin, you will face a margin call. This means you either need to deposit more money or close positions to meet the margin requirements. If you fail to do so, your positions may be forcibly liquidated, resulting in significant losses.
- Limited risk management: The pursuit of higher returns in leveraged trading may cause some traders to neglect proper risk management, leading to poor decision-making and devastating losses.
- Overleveraging: Some traders may take on excessively large positions relative to their account size and risk tolerance, which can lead to substantial losses if the market moves against them.
For a full break down of most crypto trading problems and how to solve them,
Check out this article: 5 Things Still Holding You Back From Becoming A Profitable Crypto Trader!
How To Manage Risks When Leverage Trading Cryptocurrency
1. Determine How Much You Want to Risk per Trade:
Most inexperienced traders approach trading with a gambling ideology. They go into trades without properly determining what their risks are and what the potential reward will be. One way to do this is to calculate your positions in ratios (Risk/Reward ratio).
Say you have $1000 as your initial capital and you want to risk $100 to gain $300. This just means your risk to reward is 1:3. Simply put you are risking 1 to get 3.
2. Use Stop Loss Orders When in Leveraged Trades:
After you have determined how much you want to risk per trade, you also need to factor in the fact that the market can go against your position, so it is important to have a stop-loss order.
A stop-loss order is an automatic order that is placed to limit a trader from taking more losses than he bargained for. This order immediately gets triggered once the crypto price crosses the level you have predetermined.
3. Use Take Profit Orders in Leveraged Trades:
After your stop-loss order has been set, you want to go ahead to predetermine the price you want to take your profit when the market moves in your favor. Take profit order helps you automatically close your trade in profit.
This order is very important especially given how volatile the crypto market can be. A failure to book profits early could easily see it turn to losses as price reverses.
What type of investor are you? Check out this article: 6 Popular Crypto Investment Strategies in 2023 and How To Use Them
Best Crypto Exchange Platforms for Leverage Trading Cryptocurrency
There are several popular crypto exchange platforms available for users. However, some stand out from the rest when it comes to the kind of service they offer, the amount of tradeable coins they have available and more.
The goal is to find a crypto exchange Trading platform that suits your exact needs. Here are some well-known options:
1. Binance Futures:
If you are looking for high leverage or a high amount of tradable coins, Binance is the best crypto exchange platform for you.
Binance Futures is the futures trading platform offered by the cryptocurrency exchange Binance. It supports leveraged trading with various cryptocurrencies and provides up to 125x leverage. Binance Futures is integrated with the Binance ecosystem, allowing seamless transfers between spot and futures trading.
Check out this article: Binance Futures Review 2023: Is It Safe, Pros and Cons
2. Bybit:
If you are looking for security, an easy to use platform, and just top class services, Bybit is the best for you.
Bybit is another popular platform for leveraged trading of cryptocurrencies. It offers up to 100x leverage and provides perpetual contracts for trading multiple cryptocurrencies.
Bybit is known for its user-friendly interface and advanced trading features. It is also know for offering one of the highest deposit/sign-up bonus in the crypto industry.
Check out this article: Bybit Review In 2023: Pros, Cons, New Products, and Warnings!
3. BitFlex:
If you are looking for a crypto exchange that does not require KYC to sign-up a trade with, BitFlex is the best option.
BitFlex, a fast rising crypto exchange platform that offers up to 100x leverage on certain contracts. It has a user-friendly interface and provides advanced trading features for experienced traders.
Check out this article: BitFlex Review. How to Trade With No KYC
Conclusion
Leveraged trading carries risks because it amplifies both gains and losses. Before you start, it’s important to research and understand the platform you’re using, including its features, fees, and risk management tools. Also, assess your own trading experience and risk tolerance before getting involved in leveraged trading.
Check out this article: 5 Steps To Finding The Crypto Investment Style That Suits You. Beginners Guide
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