In recent years, leveraged cryptocurrency trading has gained enormous attention as an investment strategy that offers the potential for huge profits. In this article, you will be able to learn all about the basics of leveraged cryptocurrency trading, how it works, and what its advantages and disadvantages are.
If you want to learn how to make money trading cryptocurrencies with leverage, sign up for the free webinar at https://zannekrep.com/brezplacen/kriptowebinar
In the world of cryptocurrencies, where volatility is the main market factor, leverage can be an extremely powerful and useful tool for people who want to take advantage of cryptocurrency price fluctuations. By borrowing funds to increase their trading positions, individuals can multiply their potential profits in a relatively short period of time. However, it is important to acknowledge that this approach also carries a certain level of risk, as the potential for greater losses increases alongside the potential for greater gains.
Cryptocurrencies, or “crypto,” are digital currencies used as an alternative means of payment, or people use them as an investment for the future. Cryptocurrencies got their name from the cryptographic techniques that allow people to securely buy, sell, or trade them without the need for a supervisory authority, such as a government or various financial institutions. Bitcoin was developed as a form of payment that is not controlled or distributed by a central bank.
What is “Leverage” or financial leverage
Trading cryptocurrencies with financial leverage, or leverage, means using borrowed capital to increase your buying or selling power. This allows cryptocurrency traders to open larger trading positions relative to the capital they have in their digital wallets or crypto exchanges. Depending on the exchange you use, you can utilize financial leverage of up to more than 100 times the balance in your account.
In addition, the use of financial leverage allows traders to buy or sell assets even if they do not have that financial leverage. They can open a long or short position on a cryptocurrency based on the collateral deposited.
Cryptocurrency traders around the world frequently use leverage to generate larger profits. However, it should be noted that greater financial leverage also means a greater possibility of liquidation.
Liquidation is a process that can occur when an investor takes on a leveraged position. The liquidation process means that traders are forced to close their positions. A trader may suffer a partial or even complete loss of their initial margin. In other words, they are unable to meet the margin requirements for a leveraged position. They simply do not have enough funds and cannot keep their position open.
How to use financial leverage
Before you want to start using financial leverage, you will need to deposit sufficient funds into your trading account. This initial capital deposited into the trading account is known as collateral. Depending on the financial leverage, the total value of the position you wish to open, and the type of cryptocurrency, the required collateral (also known as margin) may vary.
The amount of financial leverage you will be able to use is most often expressed as a ratio. A leveraged position of 1:10 means that you will multiply your position size by 10x. For easier understanding, let’s look at an example:
If you want to invest 1,000 US dollars in Bitcoin with 10x financial leverage, the required margin would be 1:10. This means that by simply depositing 100 US dollars, you will be able to open a position worth 1,000 dollars. If you want to use 20x financial leverage, the required margin would be even lower, calculated as 1:20 of 1,000 dollars, which ultimately amounts to 50 dollars. However, it is important to note that higher financial leverage comes with a greater risk of liquidation. At that point, the exchange you are using takes over the collateral in your trading account.
In this case, you will need to pay interest on the borrowed funds and any losses incurred on the leveraged position. This is precisely why you need to be careful about how much financial leverage you choose to use, as it can result in extremely high interest charges.
Once you have deposited the initial margin, you will need to maintain a “margin threshold.” If the market moves drastically in the opposite direction from your position, the margin can fall below the margin threshold, putting you at risk of liquidation. In such a scenario, you will need to deposit additional funds into your trading account in order to keep your position open and, ideally, avoid liquidation.
Advantages of using financial leverage
By using financial leverage, you can increase your exposure to cryptocurrencies. If you believe and are confident that a particular cryptocurrency will move in a certain direction, you can open a long or short position on it without having to invest large sums of capital. If the market were to move in the anticipated direction, you could earn enormously by trading in that position.
Financial leverage allows traders to allocate their limited capital to other aspects of the crypto market, such as staking and providing liquidity, to earn returns on their current capital.
Specific examples of leveraged trading:
Example 1:
1:5 leverage means $100 x 5 = $500. This way, with just $100, you can buy a position worth $500.
1:10 financial leverage means $100 x 10 = $1,000. Here, with just $100, you can buy a position worth $1,000.
You may have already considered using higher financial leverage to purchase the same number of shares with less capital, as in that case you would only need $50 to buy shares worth $500 with 10x financial leverage. However, keep in mind that the reverse can also be true.
Example 2:
1:10 financial leverage means $100 x 10 = $1,000. Here, with just $100, you can buy a position worth $1,000.
1:20 financial leverage in this case means $50 x 20 = $1,000. So with a smaller investment and higher financial leverage, you can buy a position worth $1,000.
Trading fees and interest paid or received are determined based on the nominal amount when trading derivatives contracts. Since we are trading a position worth $1,000 either way, we pay the same fees and interest. Why not use higher financial leverage and pay less margin? If the price rises as you expected, you will earn nicely. However, if the price falls, you need to be aware of the risk, as higher financial leverage comes with accelerated liquidation.
If financial leverage is not used in trading, even when the price in your position drops from $100 to $1, you can still get your dollar back by selling your position.
When trading with financial leverage, when your position margin falls to the maintenance margin threshold, you will receive a margin call from your exchange or you will be liquidated. To avoid liquidation, you can use lower financial leverage.
Staking means locking up your crypto assets for a certain period of time to help operate the blockchain. In exchange for staking your cryptocurrency, you will earn a certain percentage of your crypto assets.
A long position is when an investor buys an asset with the assumption that the price of the asset will rise in the future. Consequently, asset purchases are made with the intention of making a profit without intending to sell them in the near future. This type of position only requires that you have enough money for purchases, brokerage fees, and other commissions.
Conversely, short positions are when an investor or trader believes that the price of an asset will fall in the future and wants to profit from the price decline. They will use a special technique to try to take advantage of this situation. One of the most common short position techniques is short selling. Compared to a long position, a short position is somewhat more complex for beginners.
Essentially, short selling is a strategy in which you sell cryptocurrencies that you do not own, intending to buy them back later at much lower prices. In general practice, you must borrow shares that you believe will fall from an investment bank or other financial institution.
Ways to manage risk when using financial leverage
Now that you know how financial leverage works, it is important to manage the risk when using it. The following are ways you can do this:
Define your risk
Before deciding on the level of financial leverage you intend to use, you must first determine the percentage of your capital that you are willing to risk. A common piece of advice from many experts is to never risk more than 5 percent of your total trading capital on a single position, regardless of how promising the theoretical profit may seem. This is extremely useful because no position is 100 percent guaranteed to end according to your expectations, and if trading is constantly going against your wishes and predictions, excessive financial leverage will expose your wallet balance to high risk.
Use ”Stop Loss” and ”Take Profit”
Stop loss and take profit orders are types of market orders that help traders control the amount they earn or lose on any given open trading position. A stop loss helps limit your losses when the price reaches a certain point that you have set in advance, while a take profit secures your profit when the price reaches a certain point.
Stop loss and take profit orders will help you maintain control, regardless of how bad market conditions are or how high a financial leverage you are using. In the event that you do not want to use a ”Stop Loss”, you can lose a huge amount of money due to a single bad position.
Keep a separate account
The crypto market is unpredictable; even with the best analysis, the market price can still go against your predictions. Since you cannot always be accurate, it is dangerous to use the entire amount you have in your account. This can affect your emotions, as you do not want to lose your entire portfolio. For this reason, it is better to have a separate account for leveraged trading, allocating a specific amount of your capital to it.
Try using a simulated account
You cannot control the amount of financial leverage you use if you do not understand how it works. One of the best ways to understand how it works is to try it out on a simulated account, as it involves no risks to your capital.
By trading with ”demo” capital, you will be able to learn how financial leverage works, and in doing so, you will be able to know what amount of financial leverage you are using. A ”demo” trading account is an excellent option for all beginners.
The leverage you use will affect your profit and loss in the same way it would on a live account. This can help you determine how much financial leverage you are comfortable with, or whether using any financial leverage interests you at all.
Conclusion
Financial leverage is, so to speak, a double-edged sword: while your investment grows, so does your risk. Using financial leverage can be extremely beneficial for your assets if the market moves in your favor, but the opposite also holds true.
Furthermore, financial leverage increases the volatility of the cryptocurrency market. This is because when a large number of people have their positions liquidated at the same time, a large amount of assets is ”wiped” from the market, which can cause significant price swings.
Always practice risk management and add stop-loss and take-profit where appropriate to protect your account from liquidation.
If you would also like to earn money trading cryptocurrencies using financial leverage, join us at our free webinar. Register at: https://zannekrep.com/brezplacen/kriptowebinar
What will you learn at the free webinar on Tuesday?
- The secrets of crypto trading, known only to a handful of people in Slovenia!
- How to earn more with cryptocurrencies even with a small amount of money? (you only need €100)
- First steps to start earning with cryptocurrencies (even for complete beginners).
- How to earn with cryptocurrencies even if you don’t buy any cryptocurrencies at all
- The exact strategy that allows Reni Markovič from Koper to generate higher crypto returns.
- How to generate good daily and weekly profits in the cryptocurrency market (at least 100 euros profit per day!)
… And much more …We are not financial advisors. All information regarding cryptocurrencies is accepted at your own risk. Do your own research as well.
