What Is Leverage Crypto Trading

Leverage trading is a trading strategy where you increase your trading power to try and earn bigger profits. But with this advantage, leverage trading also has its own disadvantages and risks.

Home / Cryptocurrency / What Is Leverage Crypto Trading

Cryptocurrency Guides

Crypto trading has become a very popular form of leveraging the financial markets to make a profit and each day more and more people join this sector. The main attraction of crypto trading is the potential profits that you can be made even with a small amount of trading capital. Since cryptocurrencies are speculative assets and their prices move based on people’s belief in them, it makes them very volatile and this volatility can be used to your advantage to make big profits.

But there is a way to increase your profits even further, and it is by using leverage. Leverage trading is a trading strategy where you increase your trading power to try and earn bigger profits. But with this advantage, leverage trading also has its own disadvantages and risks. So what exactly is crypto leverage trading and should we use it?

Crypto leverage trading

Crypto leverage trading is a trading style in which you increase your trading power by borrowing money from the broker. Most of the brokers have leverage available on their platform and traders can choose the amount of leverage they want to use. When you are using leverage trading you have to choose the amount of leverage you want to use, with each broker having their own max amount. The leverage is usually displayed as X:1 where X indicates the amount of leverage and shows how many times your trading power will increase. So for example, a leverage of 10:1 means that, if you start crypto trading with $100 and use 10:1 leverage, you will be able to trade with $1000 instead of $100.

These additional funds are provided by the broker and in return, brokers charge you a small fee every time you have an open position with leverage. This makes leverage trading a very attractive thing to use when trading with cryptocurrencies since crypto already has high-profit margins, with leverage you can increase these profits even further.

Risks of crypto leverage trading

Leverage trading is not unique to cryptocurrencies and most financial markets have leverage, but crypto leverage trading is most certainly the riskiest one out of them all. As we mentioned above, brokers are the ones providing these additional funds, so in order to protect their funds from being lost by the trader, they have implemented what’s called a liquidation price and margin call.

Every time you open a crypto position using leverage, you will be given a liquidation price mark. This liquidation price tells you the price mark of an asset, where it becomes unprofitable and risky for the broker to continue giving you these additional funds. So when the price of an asset reaches liquidation value, the position will be automatically closed and you will lose all of your money, in the worst case, you can even become indebted to the broker.

In order to avoid your position being liquidated, brokers have introduced margin calls. This is a notification you receive when the price of an asset is getting close to the liquidation price and you should either fund your account with additional funds or close the position yourself before it gets liquidated.

Should we use leverage when trading with crypto?

Using leverage when trading with cryptocurrencies has its own advantages and disadvantages. It can significantly increase your profits and even with a small amount of trading capital, you can make very big profits. But it can also backfire and your position can get liquidated. Because of this, many people wonder if it’s worth using leverage when trading with crypto.

The answer to this question depends on the current market conditions and the amount of leverage you use. The crypto market is extremely volatile, but this volatility is not constant, meaning that there are times when volatility is super high and there are times when volatility is low; by crypto standards at least. So if you plan on using leverage, it is best to avoid high volatility market conditions, as price swings can be very significant and prices can reach liquidation marks without you even realizing it.

It is also important to limit the amount of leverage you use. When using leverage, the higher this leverage is, the closer the liquidation price is to the entry price. What this means is that high leverage can result in you losing all of your funds very quickly as it is much easier for the liquidation price to be reached. Since cryptocurrencies are already volatile and have good profits, using low leverage should be sufficient enough, as it will still increase your profits with less risk of losing all of your money.

FAQs on crypto leverage trading

What is 10x leverage in crypto trading?

10x leverage in crypto trading means that you are using the leverage of 10:1, meaning that the broker will give you the ability to trade with 10 times more money than you actually have. So for example, if you are using 10x leverage and have trading funds equal to $100, it means that you will be able to open a position worth $1000, thus increasing your profits by 10 times.

Is crypto leverage trading risky?

Crypto leverage trading is a risky approach to take. Every leverage trade has a liquidation price, meaning that if the price of an asset reaches liquidation value, your position will be closed and you lose all your money. Since cryptocurrencies are highly volatile assets, reaching this liquidation value is not that uncommon, meaning that there is a good chance that you will lose all of your money. But you can control these potential losses by implementing stop-loss orders in your leveraged trades.

Recommended Brokers