Leverage trading is not a new concept, as it has been used in traditional markets for a long time. It can amplify an investor’s buying and selling power, allowing them to trade with significant amounts and make larger profits. If you don’t have much experience with trading, leveraged trading can be a bit confusing. In this article, we will focus on leverage in the crypto markets, so you’ll better understand how leveraged trades work.
What is leveraged trading in crypto?
Simply put, leverage refers to borrowing capital to make crypto trades. It allows investors to trade with more money or digital currencies than they actually own. Trading platforms like crypto exchanges will enable you to borrow almost 100 times your account balance. Let us explain this further. The amount of leverage you can use is presented as a ratio, like 1:5 (5x), 1:10 (10x), and so on. This ratio shows how much your initial capital can be multiplied. For example, a 10x leverage would give your $100 the buying power of $1000.
Different crypto assets can be traded using leverage. The most common leveraged trading types are margin trading, leveraged tokens, and future contracts.
Cryptocurrency margin trading
Margin trading is one of the existing trading strategies that use funds provided by a third party. A margin account allows traders to gain access to higher borrowed capital and leverage their positions. Margin trading is used in cryptocurrency markets because it helps investors obtain a big profit with less capital involved.
How does leveraged trading work?
The first thing a person interested in trading with leverage should do is deposit funds in their trading account or exchange account. That initial investment is called collateral. The amount of collateral that is needed depends on two factors: the leverage you plan to use and the margin. High leverage increases liquidation risk, while lower leverage decreases the risk.
Besides the initial capital, one must also maintain a margin threshold for any trades they plan on doing. This threshold is also called maintenance margin. If the market moves contrary to your position, the margin can get lower than the threshold. In such a case, the trader must pour more funds into their account or risk being liquidated. Leverage trading can be used for both short and long positions. When a user opens a long position, they believe the price of an asset will increase. On the contrary, opening a short position shows that the traders expect the asset price to go down.
Benefits of using leverage in crypto trading
The most obvious benefits are the possibility to trade cryptocurrencies with a better position size and the promise of larger potential profits. On the downside, leverage can be a double-edged sword and lead to increased losses.
Another good reason that makes crypto users trade with leverage is capital liquidity enhancement. Using higher leverage allows a trader to start with lower capital so that they can redirect their remaining digital money towards other activities ( buy and sell NFTs, invest in other digital assets, extra liquidity for decentralized exchanges, etc.).
As you can see, leverage trading can help you gain considerable profits while only investing a small amount of capital. However, we advise caution and a full understanding of market volatility so you can better manage risks. Never trade funds you can’t afford to lose, as no trading strategy can guarantee complete success.
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