What is leverage trading in crypto? Leverage trading, in the most basic definition, is trading that involves borrowing more money than you can afford to increase the number of underlying assets that are involved in the trade. Leverage trading allows you to have a much bigger position in the market with a much smaller amount of capital. However, it is important to note that the methodology is highly profitable but also extremely risky as you can lose more than you can afford to. Leverage trading works the same way in crypto as it does in the stock market. Leverage trading in crypto allows investors to make spot transactions with borrowed capital from the brokers. Often, the capital exceeds the account balance of investors and serves as a way to maximize profits by increasing purchasing power.
So What Is Leveraged Trading?
Depending on the platform you use, the leverage trading process might be a little different from each one. Once you have decided the amount of leverage you would like to use, you simply press borrow. This will provide you with a substantial amount of equity that you will then be able to use to execute trades. *Note that there are fees associated when borrowing, so make sure that you understand the fee structures.
The image above demonstrates leverage trading
You see the potential in cryptos and strongly believe that it will be the future. But, you only have $500 to start with. You want to maximize your gains, so you utilize leverage. You go to an exchange and get a 100x leverage, turning your $500 into $50,000. Now you have $50,000 that you can invest into the market!
Pros and Cons of Leverage Trading
What are Leveraged Tokens?
Apart from leveraged trading, there are also leveraged tokens. Leveraged tokens allows you to take a leveraged position on a cryptocurrency. Just like leveraged trading, with leveraged token, your earnings or losses will be multiplied. It is important to note that leveraged tokens often have extra fees tied to it. Management fees vary with each exchange, but most are on a daily rate which can slowly add up.
For example: Binance has a 0.01% daily management fee for its leveraged token.
A good example of this is the token called 3X Long Bitcoin Bull (BTCBULL), which triples the profits of a Bitcoin investment. Hence, for every 1% increase in BTCBULL, the leveraged token will increase by 3%. The same terms apply if the price of Bitcoin drops by 1%.
Thus, trading leveraged token also means it is susceptible to high volatility adding onto the existing volatility of cryptocurrencies.
Where can I trade with leverage?
While the benefits of leverage trading seem lucrative, the tool also comes with a lot of risks if used poorly. Before you decide to use any of the tools mentioned above, we recommend you do your own research!
Disclaimer: This article does not serve as financial advice.