How To Use Leverage Full Guide On Cryptocurrency Leverage
Leverage can be a vital tool for your cryptocurrency trading endeavors. Whether you decide to trade on DIY basis or use our top-rated crypto signals leverage has the desired impact of increasing your purchasing power.
That is to say, if you only have $100 in your brokerage account but apply leverage of 1:10 you are instantly boosting your trading capital to $1,000. But, leverage also increases your risk as on top of applying profits, it does the same for losses.
In this guide, we explain the ins and outs of how to use leverage in a risk-averse manner. We also discuss the best crypto trading platforms that offer leverage to retail clients.
Learn Learn And Never Stop Learning
Leverage is a highly risky, advanced feature of trading. Regardless if youre trading crypto, stocks, commodities, gold, forex and what not, you should be highly informed before dipping your toes in. Taking a few courses from knowledgeable traders, actively watching several series of YouTube videos and soaking up as much information as possible will be the basis of your leverage trading education.
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Where Can You Trade Bitcoin Futures
Growth of the bitcoin futures market has paralleled that of the cryptocurrencys spot market. Cryptocurrency exchanges were the first venues to offer bitcoin futures trading capability. But the absence of regulation for cryptocurrencies made them risky venues for serious traders.
The launch of bitcoin futures trading at CME and Cboe changed the status quo. While Cboe has discontinued bitcoin futures trading at its venue, CME has doubled down on cryptocurrencies and introduced other derivative products related to it. For example, the Micro Bitcoin futures is 1/10th the size of a standard bitcoin futures contract at CME.
Bakkt, which is backed by NYSE owner Intercontinental Exchange, was launched in 2019 and advertises itself as an end-to-end solution to promote regulated price discovery and market liquidity. It also offers trading in physically settled bitcoin futures and options. ErisX is a Chicago-based trading firm that offers cash-settled bounded bitcoin futures trading capability that limits exposure to the cryptocurrency by setting upper and lower bounds.
Exchanges like Seychelles-based OKEx and Malta-based Binance are some of the biggest venues for trading in bitcoin futures. The latter exchange, in fact, is ranked first based on the numbers for open interest contracts on its platform. However, it is not regulated by U.S. authorities.
What Leverage Ratio To Use How Much Of A Drop Could Your Asset See
Correctly setting your leverage rate is vital to ensuring the best risk/return ratio. For example, if you know its normal for a certain coin to move 5% for no other reason than supply and demand, you might want to take that into account while choosing your rate.
I will demonstrate this by changing the leverage ratio on the BTC example seen before. In the example, BTCs price when the trade was opened was $56,500. The price rose by 4% to $58,760, only to later drop to 4% below the opening price, to $54,240. With a leverage ratio of , that would represent a profit or loss of $200, depending on when you exited the trade.
If we set the leverage ratio to , the value of the position would be $25,000, rather than $5,000, with a 4% profit or loss being worth $1,000 – twice the traders margin. The 4% volatility could have knocked the trader out of the water in minutes. If the provider did not close the position, the investor would make a 200% loss! However, in most cases, the position would have been automatically closed as soon as the price of BTC lowered by 2.5%.
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Best Cryptocurrency Exchanges With Leverage Trading Incentives
eToro is an international financial broker that offers a financial trading & investment platform that provides a host of markets such as Stocks, Commodities, Crypto, ETFs, Indices, and Forex.
It is also well renowned for its social trading platform. A remarkable feature of eToro is the ability of users to copy trade the very successful traders or get copied themselves to receive consistent profits.
Users of the platform can trade both long/short positions in a broad list of markets.
The brokerage recently enlarged its offering to comprise crypto-assets allowing its investors to leverage trade and invest in Litecoin, BTC, Ethereum, XRP, and 12 other prominent digital assets.
These coins are traded as CFDs, meaning that you dont hold the digital currency and predict only its price movements.
We recommend the above exchanges for those who would like to execute margin trades and gain leverage up to 3, 5, 100, or 125 times on their trades. It also offers a way to earn passive income.
With headquarters in San Francisco, Kraken is one of the biggest BTC and altcoin platforms in the United States. It is also the largest exchange with regards to its EUR volume where users can signup with their email ID and begin using the platform after correct KYC checks.
It normally lasts up to 7 days to complete the verification on Kraken, thereafter, you can trade with fiat currencies like EUR, GBP, USD, CAD, etc.
- Futures trading with a leverage up to 125 times
The Benefits Of Knowing Without Trying
Learn Crypto is dedicated to explaining basic concepts within cryptocurrency to people who are new to the subject. Given the level of potential risk leverage trading is something that really should be left to very experienced traders.
You might think that reading this article is a waste of time that is far from the truth.
You may not be a skilled enough skier to ever attempt a black run but it is still important to understand the challenge and danger. It helps create a mind-map for the spectrum of risk involved in skiing and where you sit.
The same is true of cryptocurrency. The more you understand, the more you can make sense of news, sentiment and adoption.
This kind of dramatic event triggered a wave of liquidate leverage positions within crypto, and Margin Calls in other markets, with traders closing crypto positions to fund. This created a cascade effect. With Bitcoin dropping from a high of $7,648 to a low of $3,870.
The traditional safe havens are struggling right now, possibly because the institutions are liquidating positions in these assets to fund margin calls in the equity markets.
Where previously reporting of that kind of event from sites like Coindesk might have made no sense to you, by learning about subjects like leverage, you have the ability to absorb and understand what is happening from an entirely different perspective.
Next step: Security, Wallets & Keys
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They’re Popular For Their Simplicity
is usually complex and requires active management on the investor’s part. Leveraged tokens, on the other hand, are a simple alternative that don’t require you to do anything.
There’s no collateral or margin to worry about. The risk of liquidation is very low because of rebalancing. Even if the token drops in value, it will sell off some of its position, making it unlikely that it will be wiped out.
Who This Course Is For:
- Traders at any level of experience, from absolute noobs to so-called “trading gurus”. Everyone is welcome!
- 4.5 Instructor Rating
- 5,363 Students
- 2 Courses
cryptoSoup is a privately held company focused on researching cryptocurrency projects and helping newbies reduce risks when exploring the crypto space. We also provide educational services for anyone wanting to learn more about the cryptocurrency space.
On top of that, we are also developing software, via Amazon Alexa skills, that will enrich your cryptocurrency learning experience and lifestyle.
We’re here to share some of our knowledge and experience, and also to counter some of the non-sense that is disseminated by light-minded people on Twitter and YouTube when it comes to trading and investing in cryptocurrencies.
None of the information inside our courses should be regarded as endorsements for any projects, nor financial or investment advice. All content is designed to help you do your own research and it’s for educational purposes only. We are not financial advisers. Please contact your financial advisor for investment advice.
So, hope you’re gonna enjoy our courses, let’s get started!
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What Does Leverage Mean In Trading
While trading with leverage isnt anything new, it can have significant consequences in the cryptocurrency space due to its volatility. This is thanks to borrowed funds from the platform in which youre trading.
For example, if youre on an exchange that offers 50:1 leverage, you can trade up to 50x your initial investment. That translates to 50x any profits you make.
When you invest $1,000 into Bitcoin, 50:1 leverage would turn that number into $50,000. If you sell and profit, youd return the borrowed $49,000 to the exchange, but keep your multiplied profits and your initial $1,000 investment.
This is also referred to as cryptocurrency margin trading. The margin is your out-of-pocket investment. The leverage is what youre provided by the platform.
However, this comes with a risk. While the initial investment requires less out of your pocket, it is entirely liquidated if the price drops against your bet. With great risk comes great reward and also great failure.
Choose A Platform To Trade
The first step a day trader has to take is deciding what platform to use. US-based traders can use only domestically regulated crypto-trading platforms, so this is a major factor to consider when researching the right platform.
Exchange liquidity, asset liquidity, and fees are at the top of a trader’s list when choosing the right platform for them to buy and sell crypto. The volatility of the crypto market means the value of digital assets can oscillate wildly. For traders looking to maximize profits in this market, they need to make moves fast.
The first choice isn’t always the best choice when figuring out where to conduct crypto trading. For budding crypto day traders, the options and differences between the many crypto exchanges can be overwhelming.
Here are the major things to consider when shopping around for the right trading platform:
Quick tip: For traders looking for a more detailed comparison of crypto exchanges, Cryptowisser and CoinMarketCap are trusted resources to compare different platforms according to liquidity, trading volume, and cryptos supported.
Exchange liquidity is influenced by a handful of internal factors. High trading volume for the listed crypto assets, the number of active traders on a specific exchange to fulfill orders, low fees that incentivize makers to open positions, and a variety of funding options that bring more traders to the platform.
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Btc Borrows From Legacy Finance
Leverage is used widely across the entire legacy financial sector. It is used strategically in fund management and various trading strategies. Without leverage, our modern financial markets would not exist.
You can learn about leverage looking at financial markets where cryptocurrency, , borrowed a number of the concepts. And of course, one cannot look at using leverage to trade Bitcoin without noticing a hint of irony.
After all, Satoshis groundbreaking release was a reaction to failing financial markets in 2008, which were heavily influenced in part by excessive leverage.
If you are thinking about trading crypto with leverage, it would be wise to take a closer look at the fine print. In the fine print are the details your eyes glossed over when you saw how much you could make with one hunned X.
You Can Have Cash And Margin Accounts
Your crypto margin deposit is placed in a margin account, which is distinct from a cash account.
If you trade stocks, you can have a cash account and a margin account for trades and investments on the long side. To trade on the short side, there is only a margin account. In futures, margin is required for every trade, and for options, margin applies to writing or selling naked contracts but not for buying them. This applies to BTC options and futures as well.
Well come back to margin in a second.
Now leverage is simply how much more of an asset you control versus how much you have on deposit. Leverage is the ability to control more of an asset with less of your own money.
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Capitalcom Overall Best Cryptocurrency Trading Platform 2021
Capital.com is a top-rated CFD broker that offers thousands of financial markets. This includes stocks from multiple exchanges, ETFs, indices, forex, and commodities. In terms of supported cryptocurrency markets, Capital.com gives you access to over 200+ pairs. This includes majors pairs like BTC/USD and LTC/USD as well as less liquid options. For example, the platform is home to over 30+ DeFi coins, as well as crypto-cross pairs.
Irrespective of which cryptocurrency pair you wish to trade at Capital.com, you can apply leverage to your position. Once again, your limits will be dependent on where you live, the specific pair you are training, and whether you are deemed to be a retail or professional client. In addition to being able to apply leverage, Capital.com also offers buy and sell orders on all of its supported markets. This means that you can attempt to profit on both rising and falling markets – depending on whether you think the pair will go up or down.
When it comes to trading fees, Capital.com is a 0% commission broker. This means that all trading fees are built into the spread – which is the gap between the buy and sell price. In terms of getting started, Capital.com accounts take less than 5 minutes to open. You can deposit funds with a variety of payment options – including debit/credit cards, e-wallets, and bank account transfers. All payment types – apart from a bank transfer, come with a minimum deposit of just $20.
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What Is Leverage In Crypto Trading
Cryptocurrency margin trading has the same functionality as leverage trading on traditional stock exchanges.
Leverage is a way to trade with more capital than you currently have.
You do this by using capital from the exchange, almost like a loan, but without repayment.
For example, if you have 1000$ on your trading account and you trade this money with 100x leverage.
You can take 100 times larger positions than normal.
So with your 1000$, you would be able to trade:
- 1000$ x 100 = 100,000$
You can now open a position of 100,000$ with your 1000$ account.
That is the basics of how leverage works in crypto.
Many traders get confused with the idea of cryptocurrency and leverage.
Its almost as it would be impossible to do.
Remember that the exchanges providing margin are centralized and they dont operate on the blockchain like other DEXs .
So they have the same trading infrastructure as normal exchanges.
Now that weve got that out of the way, let me give you a very simple explanation of how margin works on exchanges in crypto.
Crypto exchanges have cooperation with liquidity providers that lend them money, A LOT of money.
When you trade cryptocurrency with leverage, you are partly using your own capital and the exchanges capital.
Think of it like the exchange is lending you money so you can trade larger size, on their trading platform.
Dont worry, they will not be mad if you lose their money, because thats impossible.
You cant lose any money the exchange lends to you.
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What Is Leverage Trading And What Is Margin
In leverage trading, if you have 1000USD and would like to trade with a volume of 5000USD, then you need to trade from an account or site that allows 5X leverage trading. With 5X leverage trading, you would be able to trade with a volume of 5000USD with only 1000 USD capital.
The traders initial capital is known as the of the crypto trader. Margin is the maximum amount you can lose if the trade goes otherwise.
Gains and losses can be amplified by the leverage.
How To Calculate The Biggest Position Size And Profits With Leverage
This table indicates the maximum position size you can take with different accounts sizes from $500, $1000, $5000, and $10,000. We will take a look at the difference between leverage from x5 to x200. This table shows how much capital you will be able to control in active positions in the crypto market.
Maximum position size
When we calculate the potential profits earned from trading cryptocurrencies with leverage itâs obvious that the numbers get more interesting the more leverage we use. This is also a key factor to why it has become so popular. It is definitely possible to earn a lot of money by trading digital assets with leverage and if you do it the right way you can earn more than you expect overnight. Remember to always use a stop loss or trailing stop loss when engaging in leverage trading. Read our guide on cryptocurrency exchanges with stop loss for more information about platforms that offer great order types.
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