What Is Leverage Trading in Crypto? Pros and Risks

There are many different ways to trade stocks, and thanks to the expanding adoption of cryptocurrency trading, you can use many of the same trading tactics in the cryptocurrency world. But how does leverage trading work with cryptocurrency?

 Generally, leverage trading works the same way in cryptocurrency as it does for trading stock assets, though the exact answer may depend on the platform you use for leverage trading. Read on to learn more about leverage trading in cryptocurrency, including the pros and risks.

What is Leverage Trading?

Leverage trading is a high-risk, but high-reward trading strategy. It is a broader term for types of trading where you utilize money you don’t have to make a trade. In fact, futures trading is one type of leverage trading. However, leverage trading does require the individual to put down a portion of the funds they are borrowing. This allows a relatively small trader to gain access to additional capital to try and maximize their return, aka using what they do have as leverage, which is where the term comes from.

Leverage trading can sometimes be referred to as margin trading.

How Does Leverage Trading Work in Crypto?

In general, leverage trading in cryptocurrency works the same way as it does when trading stocks. First and foremost, you need to have a platform that offers futures trading. If you don’t have one yet, or don’t know if your platform offers futures trading, scroll down, as we do include a list of platforms that currently offer these options.

To start, you’ll want to navigate to the futures trading section of where you do all of your trading, and choose leverage trading. Do note that on some websites, this is an advanced option not available to all users of the platform. You may need to have deposited a certain amount of funds or been a member for several years to be able to access futures trading.

If you are able to trade futures, but don’t see a leverage trading option, click on the futures option, as some websites combine both into a single option.

Start by putting in the amount of money you have available that you want to use for leverage trading. For example, this could be $100.

Next, select how you want to leverage it. Many websites have pre-determined options like 2x, 5x, or 100x. While it can be tempting to go for the maximum amount, know that this will determine the amount of money you borrow. So in our example above, if you choose $100 deposit at 100X leverage, you are looking at a possible loss of $10,000.

Once you choose your leverage, the exchange will borrow the funds on your behalf to make the trade. Your possible losses and your possible profits are calculated from the new number.

Then you wait to see if your bet or “prediction” comes true, and reap the rewards or losses. It is important to note that even if your bet or trade was correct, you will not walk away with $10,000, as you are only multiplying your possible outcome (minus your initial deposit.) Plus these trades carry a lot of fees and if the trade takes place over several weeks or months, you will owe interest on the portion of your trade that was borrowed from the platform.

If this sounds like gambling to you, know that it is. Futures trading of any type is gambling, as you are betting on something that hasn’t happened yet. Futures trading is one of the riskiest types of trading, both in the stock and cryptocurrency world.

**Note that some exchanges may require a maintenance margin. This is a margin that must remain in your account for the entire duration of the trade. If you drop below the specified maintenance margin, your position may be liquidated.

Pros of Leverage Trading Crypto

Leverage trading is scary, but it doesn’t mean it isn’t worthwhile to consider. Below are some of the pros of leverage trading in crypto.

1. It Can Help Small Traders Get Started

Leverage trading basically allows investors to bet on themselves and their investments. Without it, traders would find it very difficult to open worthwhile positions.

2. Making More on a Smaller Trade

Leverage trading is regularly used to make a “bet” or estimate a smaller position. For example, if you believe Bitcoin will rise in price by $1000, and want to put your entire BTC net worth of $50,000 on it, even if you are right, you will end with only $51,000, meaning you might have locked up your money for a month just for $1000.

With leverage trading, aka making your $50,000 the margin and leveraging it x2 or x4, you will make $2,000 or $4,000 off of the same initial margin.

3. Allows You to Do More With Less

The final pro of leverage trading is that while you have to keep a certain amount of funds in your account or face liquidation, it often doesn’t require tying up all of your capital in a single trade. This is especially beneficial for institutional investors and those with a low amount of capital who want to make long-term trades.

The Risks of Leverage Trading Crypto

As with anything, for every pro found in leverage trading, there are a large number of risks to consider.

1. You Could Lose Everything (And More)

Unlike regular trades, where you stand to lose everything, with leverage trading, you stand to lose everything AND more (the money you borrowed). This can cause a myriad of issues for those without a lot of working capital to begin with.

Remember, leverage trading is HIGH RISK.

2. You Could Be Liquidated Prematurely

Even if you do everything right, for the right leverage trade, if you make an insignificant mistake and trade away even one penny too many, you could have your bet cancelled.

3. The Inexperienced Suffer

Leverage trading requires a ton of knowledge, and this is reiterated when you realize most of those who crash and burn are uneducated. In short, this trading strategy is only for those who know the ins and outs of leverage trading.

What Platforms Allow You to Leverage Trade?

If you have decided to try leverage trading, check out one of the following cryptocurrency exchanges. While this isn’t an exhaustive or comprehensive list, it will provide you with some points to get started.

·      Coinbase

·      KuCoin

·      MexC

·      Gemini

·      ByBit

·      Kraken

·      Bitfinex