In trade crypto with leverage refers to the use of borrowed capital to trade. Leverage trading can increase your buying and selling power, allowing you to trade in large quantities. So even if your initial capital is small, you can use it as a guarantee to make a profitable trade. While leveraged trading can multiply your potential profits, it is also subject to greater risk – especially in volatile crypto markets. Be careful when using leverage for crypto trading. If the market moves against your position, it can cause significant losses.
trade crypto with leverage can be confusing, especially for beginners. But before experimenting with leverage, it is important to understand what it is and how it works. This article will focus on leverage trading in crypto markets, but a large part of the information is also valid for traditional markets.
What Is Leverage In Crypto Trading?
trade crypto with leverage refers to the use of borrowed capital to trade cryptocurrencies or other financial assets. This will increase your buying and selling power so that you can trade with more capital than you have in your wallet. Depending on the cryptocurrency you trade on, you can borrow up to 100 times your account balance.
trade crypto with leverage amounts are defined as ratios, such as 1: 5 (5x), 1:10 (10x) or 1:20 (20x). Shows how many times your initial capital has been multiplied. For example, suppose you have $ 100 in your exchange account but you want to open a position worth $ 1,000 in bitcoin (BTC). With 10x leverage, your 100 will have the same purchasing power as 1,000.
You can use leverage to trade different cryptocurrencies. Common types of leveraged trading include leveraged tokens, futures trading & margin trading.
How Does Leveraged Trading Work?
you need to deposit money & dollars into your trade crypto with leverage account Before you can borrow money & dollars and start trading with leverage. The initial capital you provide is called a guarantee. The required guarantee depends on the leverage you use and the total value of the position you want to open (called margin).
Says you want to invest E 1,000 in Ethereum (ETH) with 10x leverage. The required margin will be 1/10 of $ 1,000, which means you must have $ 100 for funds borrowed in your account. If you use 20x leverage, your desired margin will be even lower (20 1,000 = 1/20 of $ 50). But keep in mind that the higher the leverage, the greater the risk of extinction.
In addition to the initial margin deposit, you will also need to maintain a margin limit for your trade. When the market moves against your position, and the margin falls below the maintenance limit, you will need to put more funds in your account. The limit is also known as the maintenance margin.
Opening a long position means that you expect the value of an asset to rise. Conversely, opening short positions means that you are confident that the value of the asset will fall. While this may sound like regular spot trading, the use of leverage allows you to buy or sell assets, not your holdings. So, even if you don’t have any assets, you can still borrow and sell (open a short position) if you think the market will go down.
Example Of A Leveraged Long Position
Imagine you want to open a BTC long position worth $ 10,000 with 10x leverage. This means you will use 1,000 as collateral. If the value of BTC increases by 20%, you will earn a net profit of $ 2,000 (minus the fee), which is much more than your $ 200 if you trade your $ 1,000 capital without using leverage.
However, if the price of BTC falls by 20%, your position will fall below $ 2,000. Since your starting capital (guarantee) is only $ 1,000, a 20% reduction will result in liquidation (your balance will be zero). You could be eliminated even if the market falls by only 10%. The correct closing price will depend on the exchange you are using.
To avoid running out of money, you need to add more funds to your wallet to increase your collateral. In most cases, the exchange will send you a margin call before liquidation (for example, an email asking you to add more funds).
Example Of Leveraged Short Position
Now, suppose you want to open a short position of TC 10,000 with 10x leverage on BTC. In that case, you would borrow BTC from someone else and sell it at the current market price. Your collateral is $ 1,000, but since you are trading at 10x leverage, you can sell BTC worth $ 10,000.
Assuming the current BTC value is $ 40,000, you borrowed 0.25 BTC and sold it. If the price of BTC drops by 20% (up to $ 32,000), you can buy back 0.25 BTC with only $ 8,000. This will give you a net profit of $ 2,000 (minus the fee).
However, if the BTC increases by 20% to $ 48,000, you will need an additional $ 2,000 to buy back 0.25 BTC. Your position will be terminated because your account balance is only $ 1,000. Again, to avoid liquidation, you need to add more funds to your wallet to increase your collateral before reaching the liquidation value.
Why Use Leverage For Crypto Trading?
As mentioned, traders use leverage to increase the size of their position and potential profits. But as the above examples show, leveraged trading can also lead to huge losses.
Another reason traders use leverage is to increase the liquidity of their capital. For example, instead of having a 2x leverage position on the same exchange, they can use 4x leverage to maintain the same position size with the lower collateral. This will allow them to use the other part of their money elsewhere (for example, trading other assets, stacking, providing liquidity to decentralized exchanges (DEX), investing in NFTs, etc.).
How To Manage Risks With Leveraged Trading?
Starting trading crypto with a leveraged business with high leverage may require less capital, but it increases the likelihood of liquidation. If your leverage is too high, even a 1% price move can lead to huge losses. The higher the leverage, the lower your volatility. Using lower leverage gives you a higher margin of error in trading. That is why binaries and other Crypto exchanges have limited the maximum leverage available to new customers.
Risk management strategies such as stopping loss and taking profit orders help reduce losses in leveraged trading. You can use stop-loss orders to automatically close your position at a certain price, which is very helpful when the market moves against you. Stop-Loss Orders can save you significant losses. Tech profit orders are the opposite. When your profits reach a certain value, they automatically close. This allows you to secure your earnings before the market changes.
At this point, it should be clear to you that leverage trading is a double-edged sword that can quickly increase both your pros and cons. This includes high-level risks, especially in volatile cryptocurrency markets. At Binance, we encourage you to trade responsibly by holding you accountable for your actions. We offer tools like anti-addiction notices and cooling-off period functions to help you control your business. You should always be extremely careful, and don’t forget to help DYOR understand how to use leverage properly and plan your trading strategies.
How To Use Margin Trading On Balance?
You can use trade crypto leverage exchanges like Binance. We will show you how to start margin trading, but the concept of leverage can be found in other types of trading as well. Before we begin, you will need a margin account. If you do not have it, follow this FAQ article to open it.
1. From the top navigation bar go to [Trade] – [Margin].
2. Click on [BTC / USDT] to find the pair you want to trade. We are going to use BNB / USDT pair.
3. You will also need to transfer funds to your margin wallet. Click [Transfer Collaterals] below the candle stick chart.
4. Select the wallet for the transfer, the margin account for the destination, and the coin for the transfer. Enter the amount and click [Confirm]. In this example, we are transferring 100 USDT to a cross-margin account.
5. Now go to the box on the right. Choose between [Cross 3x] or [Isolated 10x]. In cross-margin mode, the margin is shared between your margin accounts, while in isolated margin mode the margin is free for each trading pair. You can read more about the difference between the two in this FAQ article.
6. Select Buy or Sell and order type, such as Market Order. Click [Borrow] and you will see that the 100 USDT we transferred to the cross-margin account has now been multiplied by 3x to 300 USDT.
7. You can buy BNB with leverage in USDT amount [total], or BNB amount in [amount]. You can also drag down the bar to select the percentage of balance available for use. Then you see the money you are borrowing for this business. Click [Buy Margin BNB] to open the position.
Note: you will not be able to use all your available balances as you need to pay trading fees. The system will automatically maintain the amount of the trading fee depending on your VIP level.
Leverage allows you to get started easily with the low initial investment and high profitability. However, combined with market fluctuations, leverage can lead to rapid depletion, especially if you are trading 100x leverage. Always trade carefully and assess the risks before making leveraged trading. You should never trade funds that you cannot afford to lose, especially when using leverage.