How to Leverage Trade Crypto

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Contributor, Benzinga
September 1, 2021

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Mass adoption of cryptocurrencies has increased exponentially in 2021. People have been captivated by the rise of decentralized finance (DeFi), non-fungible tokens (NFTs) and Bitcoin (BTC) setting new all-time highs. As of August 2021, the market cap of the entire crypto space sat at more than $2 trillion. A tsunami of trading volume has attracted tons of day traders looking to use leverage to pursue maximum gains.

The vast trading volumes in the crypto space have caused some traders to fear missing out on possible huge profits from trading cryptocurrencies. This fear has even led some traders to resort to borrowing funds from brokers to increase their buying power in hopes of amplifying gains. This phenomenon is the essence of leverage or margin trading. Margin is the funds borrowed from the broker used to purchase digital assets. Leverage trading is a tool that allows you to trade with a lower initial investment, multiplying both profits and losses, so there is a high degree of risk involved.

Trading Cryptocurrency on Margin

Using leverage or margin trading increases your buying power and potential profits if your trades are successful. Margin trading permits you to borrow money and trade more significant amounts than you would be able to if you only use your funds. On the contrary, margin trading also increases the risk of losing all of your money or being liquidated.

An inherent risk already exists when trading with borrowed funds. Still, margin trading within the volatile crypto markets increases said risk exponentially so crypto traders must exercise extreme caution and understand how to use hedging and other strategies to manage risk. Even becoming highly adept in identifying market trends and technical analysis won’t eliminate your risk. Overall, trading crypto with margin does offer day traders an excellent opportunity to increase profits.

How Leverage Trading Works

The way leverage trading works is that a trader will make an initial deposit to borrow funds. For instance, if you wanted to invest $5,000 in a leveraged trade at a ratio of 1-to-10, you would only need to invest $500 to open the position. However, traders must keep enough funds in their accounts as collateral for the lending platform.

An open position comes in 2 forms, long or short. Traders will open long positions if they believe the digital assets will increase in price; a short position is the opposite. When you trade a short, you borrow Bitcoin instead of cash. So if the price goes down, you buy the same BTC at the lower price and return the lenders’ Bitcoin and keep the profits.

If your long position trade is successful, the lender will release your initial cash deposit and your earnings. In the event you lose the trade, the broker will liquidate your position and keep your money. You can lower your risk of liquidation by using lower leverage. Many platforms will offer you the chance to use 100-to-1 leverage, but it’s not always the wise thing to do.

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Where to Trade Cryptocurrency With Leverage

The exponential growth of the trading volume in the crypto space has increased the demand for crypto exchanges offering leverage trading. This year has seen a new wave of exchanges specializing in crypto derivatives trading emerge. Before getting started with trading live assets, you should remember that margin trading can compound both your profits and losses. Learning technical analysis and risk-management strategies on a demo account before trading with real funds would be wise.

The FTX Cryptocurrency Derivatives Exchange (FTX)  is backed by leading crypto venture capital firms, including Binance. FTX is best known for its innovative trading instruments and low fees. Some of the state-of-the-art features FTX offers is trading with perpetual futures, options and 20 different leveraged tokens. FTX also provides deep liquidity and unlimited withdrawals catering to both retail and institutional investors.

Bybit is a crypto derivatives-only exchange that offers some of the most innovative charting features and is a top 5 crypto derivatives exchange by volume. The platform supports trading inverse perpetual and Tether (USDT) perpetual futures contracts. Bybit’s ability to handle more trades per second than most legacy exchanges has quickly made it one of the most popular up-and-coming trading platforms.

Risks of Leverage Trading Crypto

The allure of using leverage to multiply your gains can be profitable. Still, there is always a high level of risk when margin trading crypto. Keep in mind that the higher the leverage you use means you have a lower margin of error to reach your liquidation point. In some cases, a 1% difference in price could be all you need to be liquidated and suffer a massive loss of funds.

The crypto markets add another layer of risk because of their sometimes violent swings in both positive and negative directions. There are some risk-management strategies you can use to help minimize your risk when using leverage. It would be best to never trade with more than you can afford to lose and always take profits.

Stop-loss is a risk-management tool that closes your trade at a specific amount if the market moves in an unfavorable direction. Trading with smaller amounts keeps your risk low and prevents you from using all your funds in 1 trade. Using lower leverage allows you to retain more funds and open more trades.

Some trading platforms even offer a risk-management strategy called negative balance protection. Negative balance protection stops you from losing more money than what is in your account. The lending platform agrees to absorb the loss if your account’s equity goes negative as a result of the leverage.

Pro tip: Use ExpressVPN

If you want to privatize your data and hide your IP address from hackers, using a virtual private network (VPN) is a superb choice. Using a VPN service helps obscure your online identity, allowing you to trade crypto online securely and anonymously. A VPN service makes your crypto trading more secure, free from hackers and other malicious software, even on public Wi-Fi networks. You can choose from several VPNs to keep your cryptocurrency secured.

ExpressVPN has a stellar reputation for reliability and security. Its easy-to-use interface is excellent for beginners getting started with VPNs. Advanced features like preventing incoming and outgoing traffic even if the VPN is turned off make ExpressVPN a perfect choice for beginners and experts alike.

Other Ways to Leverage Your Cryptocurrency

Lending platforms like BlockFi and Celsius give users alternative options for leveraging their digital assets. These platforms allow you to provide your BTC as collateral for borrowing cash. The cash you borrowed could be used for a real estate investment or buying more BTC. Once you pay back the loan, you will receive the BTC you put up as collateral. If the price of BTC has increased by that time, you still reap the benefits.

Most people that use BlockFi and Celsius for loans are not interested in selling their Bitcoin because they believe its value will increase long term. These platforms offer Bitcoin and Ethereum investors the ability to unlock the value of their assets without having to sell.

Cryptocurrency Markets

As of August 2021, the overall crypto market cap was holding more than $2 trillion. Bitcoin is still ranging and looking to break above $50,000. Ethereum is moving to the upside towards $3,500. Several altcoins have made substantial gains this week. Solana (SOL) and Cardano (ADA) are 2 of the most notable high performers this month. 

Is Leverage Trading Crypto Worth it?

Leverage is a profit or loss multiplier. It would be good to use a demo account first to become proficient with technical analysis and understand market trends. Gaining experience in predicting how much an asset is likely to move up or down and practicing using leverage increases your chances of successful trading.

One of the keys to becoming adept at leverage trading is knowing that it’s not always necessary to use leverage. Although leverage has been a leading financial asset instrument, knowing when to use it and how could save you valuable resources. Suppose you increase your knowledge of risk-management strategies and trading methods over time. In that case, you should become proficient with using leveraged trading successfully.

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