Leveraged Crypto trading is a technique that allows you to trade up to 100 times more than your capital would normally allow, amplifying both potential profits and losses. This type of high-risk trading should be reserved for the professional, but since it can also impact price, accentuating moves in both directions, understanding how leveraged trading works is essential to understanding the crypto market.
The amount of money you withdraw into your margin trading account provides security against which the argument is willing to extend credit.
The degree to which the exchange will allow you to extend your Margin, expressed in the form of x2, x5, x10, x100, etc
It is the inverse of the leverage level. So leverage x2 means your margin ratio will be 50%. Spot trades have a 100% margin requirement because to place a spot trade. And you need to fund the Position from your account balance fully.
your Margin multiplied by the leverage. So if you put €1,000 into your margin account
when your Margin is automatically sold to cover losses incurred by your Position.
When you use leverage and bet the price will go up, you take a long position, and the opposite is a short position.
Set a loss level at which the trade is automatically canceled. Traders would see this as where they invalidate their prediction. Accepting the loss but preserving the principal so that it remains liquid.
Example Of Leveraged Crypto Trading
- If the trade suffered a 10% loss, you would lose €100 and end up with €9,900 or 99% of your initial fund, a loss of 1% of your trading capital.
- If the exchange offered you 10x leverage, you could execute the same trade, but your €10,000 would act as Margin. And you could trade a maximum position of $100,000, as your margin rate would be 10%
- The 10% gain would now translate into a €1,000 profit (10,000 x 0.10), a 10% increase in your total equity. A €1,000 loss, leaving you with only 90% of your starting capital.
- With that amplification, it wouldn’t take many trades to double your money or potentially wipe it out; with x100 leverage, any scenario could happen with one business.
- The preliminary results of a 10% drop in a prolonged position trade highlight the three scenarios. No leverage, x10 and x100, and their impact.
Leverage & Crypto Volatility
Leverage is the practical value (buying a house, trading forex), but used incorrectly, it can simply blow up in your face, which brings us to cryptocurrencies and the impact it has on the market.
Cryptocurrencies are volatile assets, so there is no apparent need for traders to leverage them to generate significant short-term profit opportunities.
There are calls to ban excessive leverage. But despite the evidence of sell-offs, every one of which is a trader getting angry, the market bottoms out, and the power eventually accumulates. It is simply too tempting and, in the right hands, very profitable.
Review What’s Wrong With Leveraged Crypto Trading?.