Leverage trading in crypto is a tool provided by exchanges that allows traders to borrow money from the platform and trade with more capital than they have. Traders can achieve higher wins if they are right, but their portfolio can also be liquidated. We’ll explore what leverage trading in crypto entails, the risks for new traders, and how these products compare to options.
- What is leverage trading in crypto
- How does leverage trading work in crypto
- Types of crypto leverage trading products
- Difference between crypto leverage and non-leverage trading
- The costs of leverage trading in crypto
- Mistakes and what to avoid when using leverage
- Conservative approach to leverage trading
- FAQ
What is leverage trading in crypto
Leverage trading in crypto is an instrument that allows traders to borrow funds from a crypto exchange to open larger positions, even if they don’t have all the necessary capital. Crypto leverage is expressed as ratios, such as 5x or 10x, which indicate how many times the initial capital is multiplied.
Traders who use leverage provide initial collateral and pay borrowing costs to have higher returns. Now, leverage trading accounts for over 80% of all trades on centralized exchanges. For example, with $1,000 of your own money and 10x leverage, you can control a position worth $10,000.
How does leverage trading work in crypto
In leverage trading, traders must have their own capital to trade, and they can increase their position size by increasing their leverage ratio. When a position is opened, traders can select the amount of collateral they allocate, which is known as margin. Then, depending on the leverage amount (2x, 5x, or 100x), the platform lends out the amount, with the initial funds remaining as collateral.
A leverage position is a contract under which they must buy or sell the asset at the price at which they close the position. Traders don’t own the assets they open a position in outright; in a trade, positions remain open until the trader closes them or reaches the liquidation price. If the market reaches the liquidation price, a “margin call” is triggered, meaning you have to pay up.
It is the same as betting that the price goes in one direction; if not, the money will be lost. When this happens, the position is “liquidated,” and all the collateral is lost.
How to manage risk when using leverage
Risk management is the first rule in leverage trading and helps protect capital by sizing trades appropriately and setting stop or take-profit orders. Crypto is highly volatile, and even a quick spike with high leverage can liquidate a position.
Stop-loss and take-profit orders are non-negotiable because they let traders follow their strategy without having to monitor or get emotional. A stop-loss is a limit order that automatically closes a position at a set price. Take-profit orders are the opposite, where a position is closed at a profit target and capitalizes on winnings.
Traders should size their trades accordingly to avoid risking their entire portfolio in one trade. One large trade with high leverage has a high risk of liquidation. At the same time, low leverage helps manage risk and understand the dynamics without exposing the portfolio to unnecessary risks.
Types of crypto leverage trading products
Several financial products enable traders to engage in crypto leverage trading. Each comes with its own set of rules, benefits, and risks.
Margin Trading: This is the most direct form of leverage trading, where you borrow funds directly from an exchange to increase your position size. You have full control over the trade but must actively manage your margin level to avoid liquidation.
Perpetual Futures Contracts: These are derivatives that allow you to speculate on a cryptocurrency’s price without an expiration date. You can hold a position indefinitely as long as you maintain the required margin. Traders pay or receive funding rates periodically to keep the contract price aligned with the spot price.
Options Trading: Options contracts give you the right, but not the obligation, to buy (call) or sell (put) an asset at a set price on or before a specific date. While not a direct form of leverage trading, options have built-in leverage, allowing you to control a large position with a smaller premium.
Leverage trading vs options trading
In leveraged trading in crypto, users open a position using borrowed funds and go long or short in the market. In options, the process differs because it involves contracts that give the right to buy or sell the asset at the option’s expiration price. In a leveraged trade, the maximum loss is the collateral posted, whereas in options, the maximum loss is limited to the premium paid for the options and cannot be liquidated.
The main difference between the two is the risk-reward profile. Leverage positions can have a higher liquidation price if more margin is added to the position. Options are influenced by factors such as time decay and implied volatility, not just by price direction.
Difference between crypto leverage and non-leverage trading
The main differences between leveraged and non-leveraged positions include capital requirements, amplification, and outcomes, as well as asset ownership.
Non-leveraged trading, also known as spot trading, involves a trader purchasing an asset at a set price and holding it. They are the owners of the asset and can sell it or transfer it outside the exchange if they please. In crypto leveraged trading, users borrow funds to open a larger position. What also differs is ownership: traders open financial contracts, borrow funds, and are forced to close the position.
Another difference is the source of funds. In spot, a person can only buy as much as their capital allows them to. When they go long on a perp, traders use their capital as collateral and can borrow up to 100x their amount, with a strict liquidation.
Essentially, non-leveraged trading resembles purchasing an asset, whereas leveraged trading is more akin to speculating on its future price direction.
The costs of leverage trading in crypto
Leverage trading in crypto involves several costs, including funding rates, trading fees, borrowing costs, and liquidation fees. These expenses can contribute to larger losses and an unfavorable outcome for many traders. Here are some of the other costs traders incur.
Trading Fees: Exchanges charge a fee for opening and closing positions, often based on a maker-taker model.
Funding Rates: For perpetual contracts, these are periodic payments exchanged between long and short positions to keep the contract price aligned with the spot price. Depending on market sentiment, you may have to pay or receive these fees, typically every 8 hours.
Interest/Borrowing Fees: In trading, you pay interest on the borrowed funds. These fees accrue over time if your position remains open.
Liquidation Fees: If you are margin called and liquidated, the exchange will add a penalty fee equal to the amount of your collateral.
Why leverage trading in crypto is bad
The high volatility of cryptocurrencies is already a significant risk; adding leverage amplifies it to the point where a small adverse price movement can wipe out your entire investment in minutes. Greed, emotional decision-making, and the illusion of quick riches often lead traders to overleverage, resulting in catastrophic losses. The psychological pressure of managing a highly leveraged position can also lead to poor decision-making and overtrading.
Mistakes and what to avoid when using leverage
To successfully use leveraged trading, traders need to understand the potential drawbacks, such as overleveraging, being emotional, and losing capital by opening and closing positions or ignoring risk management altogether.
Overleverage is a mistake retail users often make. They don’t understand the liquidation levels, open high-leverage positions of 20x or more, and allocate their entire portfolio. This doesn’t give them a chance to add liquidity during drawdowns, leading to substantial capital losses.
Another critical error is ignoring risk management. Trading without setting stop-loss and take-profit orders is like driving without brakes and leaves you exposed to significant losses. Similarly, revenge trading—trying to win back losses immediately after a losing trade—always leads to bigger, more emotional mistakes and should be avoided.
Finally, traders must understand the associated costs. Failing to account for funding rates, trading fees, and other charges can quickly turn a potentially profitable trade into a losing one.
Crypto leverage trading tips
The tips for using leverage are the same as when starting to trade with real money. It’s important to always start small and use low leverage, as it reduces overexposure, especially in crypto.
Trading with a plan also applies to leveraged positions. This means defining your entry and exit points, having a strong stop-loss, and multiple take-profits. Another tip is always to move your stop-loss after your first take-profit order to minimize unnecessary risks.
Another tip is not to be emotional when trading—and that’s why sticking to a plan is important. Take trades you know, are comfortable with, and avoid relying on others for news or tips. Finally, keep up with market news and trends to avoid going against the trend.
Conservative approach to leverage trading
Leverage trading in crypto can be a highly profitable way to access the market, but it’s a double-edged sword—especially for retail investors. It demands discipline, a deep understanding of how markets work, and consistent analysis. While the potential for big wins is high, the potential for equally amplified losses is higher.
For investors who want exposure to the crypto market without managing their risks or fear liquidations, Yieldfund, a quantitative trading company, offers access through investment plans with up to 60% yearly returns and weekly payouts. Explore Yieldfund if you want to access crypto trading without the risks of leverage or liquidation.
FAQ
What beginner crypto margin trading services are there?
In our view, beginner traders should focus on established platforms in the Netherlands, like Kraken or OKX, for leverage trading, but they should first know how to trade before using their own capital.
Where to find customer support for crypto leverage trading platforms?
Most major exchanges offer customer support through various channels, including live chat, email support tickets, and comprehensive help centers or FAQ sections on their websites.
What happens when you use 10x leverage?
When you use 10x leverage, you control a position that is ten times the size of your initial margin. For example, a position of $1,000 with a 10x leverage means a 1% price movement in your favor results in a 10% profit on your margin and vice versa.
Can you use leverage in trading bots?
Yes, in our experience, trading platforms allow traders to add leverage to their strategy but carry the same high risks, although they can be programmed to automatically execute trades and exit positions quickly.
