this high-risk trading technique has a huge impact on the price of digital assets. Some critics claim that leveraged trading is one of the main reasons for the wild price action associated with cryptocurrencies. The following content is a guide to cryptocurrency leveraged trading.
No matter which market a trader is involved in, trading with leverage means borrowing additional funds to increase the size of a position.
Think of leverage like a loan issued by an exchange that instantly adds funds to your account. The only difference between crypto leveraged trading and traditional market leverage is that the former involves cryptocurrencies. Cryptocurrency trading platforms that offer leveraged trading often allow clients to increase the size of their positions in large altcoins such as Bitcoin (BTC) and Ethereum (ETH).
Someone who takes a leveraged position in cryptocurrencies should have a firm belief that the digital asset will rise or fall within a predetermined time frame. Leverage can significantly increase one’s earnings if the trade is successful. On the other hand, since this leverage is a type of loan, if the deal doesn’t work out, the consequences are much more serious. If the price of a digital asset moves against the direction a trader initially bet on, they could lose 100% of their capital.
While cryptocurrency leveraged trading always involves a loan, the amount a trader can obtain varies from exchange to exchange. Traders can customize their crypto leveraged trades to suit their risk tolerance in a number of ways.
The amount of leverage you can use is usually expressed as a ratio. For example, someone adding 1:10 leverage to their cryptocurrency trade will increase their position by 10 times. Interestingly, some cryptocurrency exchanges offer leveraged positions of 1:100 or more!
To start leveraged trading, you first need to deposit funds or cryptocurrencies into your trading account. This initial capital is called collateral, and it determines how much leverage you can get.
Different cryptocurrency exchanges have unique margin requirements when taking out leverage. Margin refers to the collateral required to maintain a valid leveraged position in your account. Cryptocurrency exchanges can legally charge your collateral (or liquidate it) if margin requirements do not meet the agreed terms during the trade.
To better illustrate these points, let’s look at an example.
Let’s say you want to leverage 5x on Bitcoin. First, you deposit the required funds on your cryptocurrency exchange and apply for a loan. If you deposit $5,000 in collateral, a 5x leveraged position will give you $25,000.
Remember, with a 5x leveraged loan, the price of bitcoin can fluctuate 5x as much as the spot market. So, if the price of Bitcoin goes up by $100, it earns you $500. It can also be in the opposite direction. If Bitcoin falls by $100, you will lose $500. This means that Bitcoin does not have to drop to $0 for a leveraged trader to lose all their money. If Bitcoin continues to fall, it will reach a point where there is nothing left in the accounts of leveraged traders. While leverage increases a trader’s profits, it also increases the likelihood that they will lose all their money if prices drop.
While you can close out your leveraged positions at any time, you must be wary of margin requirements. If the price of Bitcoin reaches the point where your account position reaches the margin threshold, the cryptocurrency exchange will liquidate (i.e. sell off) all of your funds. Traders can use crypto leverage to bet that the price of a token will rise or fall. Those who believe the token price will go up will go long, while those who believe the token price will pull back will go short.
The above is the explanation of what is cryptocurrency leveraged trading. Remember, you don’t need to own the underlying cryptocurrency to open a leveraged long or short position. You can trade with leverage even if you don’t have Bitcoin in your account. You can open a leveraged position simply by depositing the required collateral on your exchange.
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