What Is Leverage Trading in Crypto: How to Leverage Trade

Leverage is a trading term that defines when an investor borrows funds to make a trade. Leverage is used for trading crypto as well as stocks and other assets. The amount of leverage permitted is expressed in the form of a leveraged ratio (1:10, x10, or a multiple of ten). These ratios all mean the same thing. The crypto exchange sets the leverage ratio and indicates the multiple by your actual funds is increased.

Leverage trading is an intermediate-to-advanced strategy to derive strong returns in cryptocurrency. Leverage trading allows borrowing extra funds to increase one’s position size, earning more than you can with your funding. However, it comes at a higher risk. 

This guide will examine leverage trading in crypto, how to leverage trading works, and when and when not to use it.

How Leverage Trading Works

Let’s say you invest $100 into Ethereum. When x10 leverage is applied, this multiplies your buying power by ten times and increases your position to $1,000. As each exchange decides what leverage ratio they wish to use, each crypto can also have its custom leverage ratio. Leverage can be combined with crypto derivatives, margins, futures, leveraged tokens, and other crypto assets.

Trading with Leverage

To start leverage trading in crypto, you must first deposit enough funds into your crypto exchange account to use as collateral. If you know you want to invest in Ethereum with an x5 leverage to obtain a total of $10,000 in ETH, you will need to deposit $2,000 to get there. You also run the risk of liquidation with leverage trading, so more funds than the minimum must be in your account to ensure a margin threshold.

Besides having the funds to do leveraged crypto trading, the other step is accessing it through a crypto exchange. Remember that every exchange is different in what leverage trading ratios are allowed. You may want to look at two or three before deciding on where to invest and to find the best crypto exchange. Pick an exchange that isn’t going to take extensively from your account with fees. 

Also, if you’re a beginner, it’s always smart to do some more reading, get thoroughly educated, and wait before jumping on a trading product like this.

Leverage Trading Strategies

Two of the most popular strategies investors use to combat the risks of leverage trading in crypto are stop-loss and take-profit.

Stop-Loss Strategy

Stop-loss allows you to automatically close an order once a specific price condition is met. This leverage trading strategy limits the damage a leveraged position can cause if market momentum suddenly shifts against you.

Take-Profit Strategy

Take-profit will close the order as soon as your profits hit a certain target value. This leverage trading strategy allows you to get in and out of a leveraged position within a specific time frame, limiting your profits but avoiding the risks of holding onto the position for too long.

Pros and Cons of Leverage Trading

Leverage trading is amazing when your crypto increases in value. The more money you have invested, the higher your profits and leverage trading will zip up your investment in a massive way. If the market moves in the opposite direction, you’re in trouble. The increased risk will require a more careful look into what you’re investing in and how much of your base investment amount is being put into it. With leverage trading, you don’t need to bet big, to begin with. There’s nothing wrong with starting small.

If you lose out on a leveraged crypto position, you could be facing liquidation. High leverage is high risk. Even what would normally be a small fluctuation, if you have x10 leverage, will drastically hit your wallet. Crypto is already more volatile than traditional stocks, meaning that leverage trading is extremely high risk. While there are some strategies you may be able to use to minimize the impact of losses, even so, any loss on a leveraged position may still prove devastating.

Is Leverage Good or Bad in Trading?

Leverage trading can quickly wreck your crypto investment profile if you’re using it haphazardly or encounter bad market conditions in a leveraged position. As tempting as the rewards are, remembering the risks and what can happen when the market moves in an opposing direction is important.

That said, if you are confident, are open to researching different cryptocurrencies and using tools to minimize risk, and are ready to try leverage trading, start with a small amount so that you don’t over-leverage yourself. Build from there. Eventually, you will encounter a loss, so be prepared. Amplifying your buying or selling power is always a double-edged sword.