In crypto trading, leverage for a majority of investors refers to the zone or spot that can bring maximum returns. Like a lever that helps you lift pretty much everything, leverage is the backing you could give your trades to lift them up. In financial markets and in crypto trading, you could move mountains with a little leverage when used wisely.
Leverage trading in the crypto market is a trading tool through which investors can borrow funds from brokers as they engage in spot trading. In general, leverage is higher than the amount individual traders have, and thus, it offers an excellent opportunity to boost their purchasing capacity. A major advantage of using leverage in crypto trading is that, unlike traditional markets, you could use leverage for a very small amount to push your trades. So if you’re in the market looking to trade with as little as $100, you may use up to 10X leverage which would give you the purchasing capacity of $10,000.
However, here’s the catch: there’s an equal chance of making a profit or loss with leverage. If it increases your purchasing capacity and therefore pumps up the chances of making profits, you may even end up being in more debt than you could afford if the trades don’t move in your favour. Hence, often amateur traders in the market are advised against leveraged trading while experienced traders who trade regularly can benefit from this kind of crypto trading.
In layman’s terms, using borrowed funds or taking debt for your business/trade is known as leverage. You can realise leverage through derivatives or by borrowing.
Companies taking advantage of margin trading
Borrowing capital from brokers could be a life-saver for companies that face capital deficiency. It could be used to keep production going which may, in turn, bring in more revenue. However, even in this case, the risk cannot be downplayed because if the business doesn’t get sufficient returns it may only add up to pushing the company into further debt. This can be detrimental because then a company could have more liabilities than assets which would simply ruin its future prospects. Therefore, leverage trading is often referred to as a double-edged sword as it can bring in both profit as well as loss.
Hence, leverage can only be worth the risk if the market is likely to move in your favour, if not, it simply increases your risks.
Advantages and disadvantages
Pros of Margin Trading for Crypto
The greatest advantage of margin trading is that it allows you to open bigger positions with your existing funds. This implies that the possibility of getting higher returns on each successful leveraged trade improves. Thus, higher leverage ratios could help you earn bigger and better profits.
Convenience in trading
Margin trading saves you the time required to add funds to your account in order to acquire a particular position of a certain size. If you’re working with the kind of trades where time is of the essence, crypto trading with margin could make things very convenient.
Portfolio diversification tool
Borrowed funds used in margin trading can help traders diversify their portfolios. With their existing capital, traders can open several positions in a way that doesn’t affect the position size. This can be done by allotting relatively small batches of capital to different trades instead of putting all eggs in a single basket.
Con of Margin Trading for Crypto
Larger returns generally are also associated with bigger risks. In the case of margin trading, this holds true as well. Margin in crypto trading as in any other type of trading can maximize your profit if the market movements side with your trades. However, if the market moves in the opposite direction, your losses could be amplified.
This could be particularly bad for your portfolio as leverage trading can bring tremendous losses since it increases your market portfolio.
Margin trading can be considered a great tool at hand to improve and speed up your trading performance. That said, it is always wise to be aware of all possible risks and also thoroughly understand how margin trading works before actually spending your hard-earned money. To help you gain insight into margin trading, we’ve listed some information that you may find useful:
When should you leverage?
When you want to increase your buying power
Suppose you have a certain capital with you but you spot a trade that you’d like to capitalize on. In case your current funds seem insufficient to act on the trading opportunity, margin trading can be used to improve your position and bring in more returns. Say you have $500 but the opportunity requires $1,000, you could use margin trading for the balance amount.
When you want to diversify and hedge
Using margin in crypto trading can not just help you diversify your portfolio but also enable you to protect your funds from negative market movements. Suppose you would like to buy multiple cryptos instead of investing in just one, margin trading can give your purchasing capacity a boost. To keep your trades safe, you can also use margin to open hedged positions.
When you understand your potential losses
Once you’ve spent a considerable amount of time understanding the market and how it operates, you would find yourself in a better and in a much wiser position to use leverage. As you learn to take into account the risks involved, you can have good risk management strategies in place to keep your positions safe and profitable.
Risk management while leverage trading
Stop loss is a very important part of any risk management strategy in financial trading. It cuts losses that may occur when the market moves in a different direction than what was expected. While it may not eliminate the chances of loss, it does put a cap on how much you could end up losing by liquidating funds before the value drops further.
Take Profit is an effective strategy that keeps assets safe while also protecting against unpredictably volatile situations. Technically, it is the opposite of a stop loss position which implies that the predefined profit mark has been hit and the funds can be liquidated.
When you go for margin trading, it is important to remember that the higher the leverage the bigger the risk. So you may be tempted to take a 100x leverage over a 10x leverage for your funds but do take into account the fact that if the market’s mood is not in your favour, the assets on which you’ve actually spent your own money could get liquidated.