Leverage in Crypto Trading: How Does It Work?

Leverage in Crypto Trading: Over the past few years, cryptocurrency has grown dramatically across the globe. After all, successful trading can expose users to a huge amount of profit within a short time. While the term “leverage trading” is popular in the crypto trading world, only a few people actually know what it truly means.

Also referred to as margin trading, leverage trading involves using borrowed capital to invest in cryptocurrency. For those that wish to dabble in trading cryptocurrency, this is the ideal strategy for you.  Trading with leverage allows you to borrow capital to increase your purchasing capacity as your profit is raised. If you wish to understand what leverage trading is and how it works, keep on reading.

What Investors Like About Leverage Trading

In cryptocurrency, leverage trading represents a tool that enables investors to carry out purchase and sales transactions by using borrowed capital. Oftentimes, the investors’ balance is not up to these funds. For this reason, leverage trading is an ideal means through which profits can be maximized as the purchasing capacity is increased.

Besides this, another benefit of adopting leverage trading is that investors can go into transactions with a small number of funds, which is unthinkable for general trading. Take, for example, a trader who engages in leverage trading with $100. They can actually trade for 10× margins. This has the potential of multiplying profits.

Drawbacks of Leverage Trading

In spite of the obvious upsides of adopting leverage trading, there are various downsides that are associated with it. You must understand that in a highly volatile crypto market, where significant price fluctuation can result in substantial losses within a short period, engaging in leverage trading is subject to a high level of risk. This is the reason why it is not the best choice for beginners. 

In fact, experts sometimes experience big losses when they opt for this type of trading. There should be proper risk management to minimize the exposure to risk. Investors often invest in small amounts when they wish to engage in leverage trading.

How does leverage trading work?

Before you can engage in leverage trading, you must deposit some funds into your trading account. The initial capital that is provided to borrow funds is called collateral. This required capital depends on the value of the position you wish to open, as well as the leverage you use. 

Take, for example, a trader who wishes to make a $2,000 investment in Ethereum with a 10× leverage. The required margin must be one-tenth of $2,000. This implies that they must have $200 in their account as collateral for these borrowed funds. For a 5× leverage, the required margin would be higher, which is $400. However, it must be noted that higher leverage comes with higher risks of becoming liquidated. 

Besides this, it is necessary for investors to maintain specific margin thresholds for their trades. To avoid liquidation, you must add more funds to your accounts whenever the market condition moves against your position, and you discover that the maintenance threshold is higher than the margin.

The use of leverage trading applies to both short and long positions. You only consider a long position when you expect the price of an asset to increase. On the other hand, adopting a short position implies that you expect the price of the asset to fall. Even though this might seem like regular spot trading, adopting leverage trading allows you to sell or purchase assets, which does not depend on your holdings but only on your collateral.

Even if you have no assets, you can still borrow and sell them if you expect the market to fall.

Conclusion

The use of cryptocurrency has gained more attention than ever: Cryptocurrency can be used to buy online. Unsurprisingly, this has made crypto trading popular. While trading cryptocurrency can be generally simple, you might be looking for other options that might be a little bit more advanced. If this is what you want, that is where leverage trading comes in.

You can amplify your profits and losses from price fluctuation, which ensures that you can implement complex trading strategies. Before adopting leverage trading, you must get yourself acquainted with the risks and features that come with it. With leverage trading, you can enjoy significant gains even with small collateral.