Leverage is one of the basic trading concepts. Beginners rarely jump into leverage trading right away, yet learning about the opportunities it offers is essential for everyone. On the one hand, leverage increases position size by borrowing extra funds, which allows traders to earn significantly more than they would if using their own funds alone. On the other hand, it is riskier.
In this piece, we will explain leverage trading in the cryptocurrency market, so you can make an informed decision about whether you give it a shot.
What is Leverage?
In crypto and spot trading, leverage means borrowing funds to trade crypto, stocks, or any other assets. In other words, you can use more money to make money. The amount of leverage you can have is usually expressed in the form of leverage ratio. The ratio differs on various exchanges and can also vary from pair to pair. On HitBTC, for example, you can borrow up to x100 of your actual balance.
The ratio indicates the number of times your actual funds are increased, with 1:5 (x5), 1:10 (x10), or 1:20 (x20) being some of the most common variations. For instance, an x5 leverage will multiply your buying power by 5 times and increase $100 ETH position into $500.
The same exchange can have different leverage ratios for different token pairs. On HitBTC, you can access x10 leverage on BTC/BUSD, and 5x on SOL/ETH. On top of that, leverage also works with crypto derivatives, margin, futures, and leveraged tokens.
Although the margin and leverage concepts seem similar, they are, in fact, inversely related — the higher the margin, the lower your leverage ratio.
Crypto Trading With Leverage
So how does one start trading with leverage? First, ensure you have deposited enough funds into your crypto exchange account to use as collateral. If you have a certain number in mind, you need to do a simple calculation of leverage and margin. To obtain $10,000 worth of BTC with an x5 leverage, you will need to deposit $2,000 in BTC.
Additionally, to avoid liquidation when a market moves against you, you will have to ensure a margin threshold or maintenance margin by depositing more funds.
Leverage works with both long (anticipating the asset price will go up) and short (anticipating the asset price will decrease) positions.
Benefits of Leverage Trading in Crypto
One obvious advantage of using leverage is that the more money you trade with, the higher your profits will get. However, if the market moves in a different direction, potential loss can be disastrous. Moreover, leverage helps with increasing the liquidity of your funds. You can work with lower collateral when using x4 leverage than betting everything on x2 within just one crypto exchange. The rest of the funds can be used elsewhere, be it trading, staking, or investing in crypto or something else.
Handling the Risks
Although x100 leverage may look attractive as it can significantly increase the initial capital, you need to always take into account the possibility of liquidation. High leverage comes with high risk, and even the smallest price fluctuation may be drastic. That is, volatility and high leverage do not match and leave you no room for mistakes.
There are a few strategies like stop-loss or take-profit that work for handling leverage trading losses. Stop-loss automatically closes orders once a certain price condition is met, while take-profit orders close as soon as your profits hit their target value.
The Bottom Line
Leverage trading can make or break your end game; although, the big losses often come from one’s inability to properly manage the risks. Volatile crypto markets make leverage trading even riskier but can also gain you a handsome profit.
Once you feel confident enough to give leverage trading a try, you can easily access it on HitBTC. The HitBTC exchange allows users to access up to x100 leverage on various trading pairs and increase their position size and profit.
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This article came directly from HitBTC, at https://hitbtc.com/blog/leverage-in-crypto-trading-what-it-is-and-how-to-use-it/