Leverage trading in crypto is when traders borrow money from brokers to trade with more capital than they hold. It’s intended for experienced traders who can apply trading strategies correctly, but it backfires when used improperly, leading to mass liquidations.
- Borrowing capital from exchanges to take a higher position is what defines leveraged trading.
- Small price fluctuations on high leverage can lead to liquidations.
- Keeping positions open for longer leads to borrowing costs that add up every 24 hours
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.
When opening a position with leverage, traders pay borrowing costs to the broker. This means the moment a position is open, traders are automatically at a loss.
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 traders are obligated to buy or sell the asset, as they don’t own the asset outright. A position remains open until the trader chooses to close it or a margin call is triggered and they are liquidated.
5x vs 10x vs 100x Crypto Leverage
The amount of leverage determines how big of a position someone takes in their trade, but also impacts how price movements affect their margin. Higher leverage increases the potential return but also influences the speed at which small moves can trigger liquidations.
When using leverage, a position size is calculated using the initial margin times the leverage.
For example, a trader with $100 in margin will control different positions:
| Leverage | Position Size | Profit from a 5% move | Profit from a 5% loss |
| 5x | $500 | $25, or 25% of margin | $25, or 25% of margin |
| 10x | $1,000 | $50, or 50% of margin | $50, or 50% of margin |
| 100x | $10,000 | Position gains 500% margin | Position gets liquidated |
In our experience, higher leverage results in more liquidations. At 20x, a position is liquidated when there’s a 5% move. At 50x, a 2% move can also cause liquidations – which means the initial margin is lost.
When we look at crypto, where prices are highly volatile, a small fluctuation from $0.08 to around $0.0792 may be enough to close the trade, even if the trader’s longer-term price prediction later proves correct.o
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 crypto trading, users open positions using borrowed funds and go long or short. 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 initial margin that’s been posted, whereas in options, the maximum loss is not limited and can incur more losses.
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. When trading 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.
How to leverage trade in crypto
Leverage trading begins with determining how much capital can be lost, not how much profit a larger position could generate. Before opening a trade, a trader should understand the product, calculate the position size, identify the liquidation price, and define an exit point if the market moves against them.
Choosing a leverage product
Traders have to decide whether to use perps or margin trading, as each comes with different rules and fees.
Select isolated or cross margin
With isolated margin, the collateral assigned to one position is separated from the rest of the account. If the position is liquidated, losses are generally restricted to that allocated margin.
Cross margin allows the platform to draw on more of the available account balance to support the position. This can move the liquidation price farther away, but it may place a larger portion of the trader’s capital at risk.
Defining the maximum acceptable loss
Assume a trader has a $1,000 account and decides that the maximum acceptable loss on one trade is 1%, or $10.
The calculation is then: $1,000 × 1% = $10
Calculate the position size
A $1,000 position with 2x leverage would require approximately $500 in initial margin. Without leverage, the same position would require the full $1,000.
Check the liquidation price
The liquidation price should be well beyond the planned stop-loss. If liquidation could occur before the stop is reached, the position is too highly leveraged, or the stop is too far from the entry.
Traders should use the platform’s displayed liquidation price rather than relying exclusively on a simplified calculation.
Place the exit orders before monitoring the trade
The stop-loss and take-profit orders should be defined when the position is opened. Moving a stop farther away after the market turns against the trade increases the amount at risk and invalidates the original calculation.
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.
Exchanges charge a fee for opening and closing positions, often based on a maker-taker model. When opening leveraged positions, traders periodically pay or receive for long or short positions to keep contract prices aligned with the spot price. Every 8 hours, traders either pay or are paid a fraction of the funding rate, depending on the size of the gap.
When a position is closed, either because it reached its target or was liquidated, traders still have to account for the fees incurred during the trade.
This means that when a position is liquidated, the crypto exchange closes the position and takes the costs from the trader’s balance. At the same time, a position that reached its target still has to pay fees – that’s why many beginner traders see smaller profits than what the platform suggests.
What are the risks of leverage trading
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 fearing liquidations, Yieldfund provides ways to access crypto yields without active trading. Speak to one of our account managers to learn more.
FAQ
What beginner crypto trading platforms for leverage trading are there?
Beginner traders should focus on established platforms in the Netherlands that hold a MiCA licenses like OKX or Kraken.
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.
Can you use leverage in trading bots?
Yes, in our experience, trading platforms allow traders to add leverage to their strategies but carry the same high risks, though they can be programmed to execute trades and exit positions automatically.
