Digital currency industry can shoot up to the moon in the blink of an eye, assuring potential of far greater returns compared to traditional investment vehicles. Thus, smart crypto traders try to open larger trading positions with sizable investments hoping for astronomical returns. But, what if you are unable to afford a mighty sum to open a larger trading position when the market is approaching a bullish state? Well, this is where leverage trading crypto saves your day. Leverage trading helps a trader to open a bigger trading position even when the trader is only able to offer a limited sum of funds. Read more at Multibank.io.
Leverage trading or margin trading works for long as well as short trading positions. We will discuss how to leverage trading crypto works in short and long but before that, let’s have a look at the core concept of leverage trading in the crypto zone.
Leverage trading in crypto
Leverage trading is nothing new and has always been a highly preferred trading strategy in the traditional trading scene. The advent of crypto has also embraced the leverage trading strategy, thereby facilitating a more strategic and economical way to aim for higher profits.
In leverage trading crypto, traders trade with borrowed funds. If you feel that you lack the certain amount of funds needed to open a bigger position, you can opt for leverage trading crypto to add more support to your initial capital with borrowed funds.
You can lend the borrowed funds from the crypto exchange where you will sign up for leverage trading crypto.
How does it work?
So, how does leverage trading crypto work?
Well, in leverage trading crypto, the trader will have to provide a sum to open and maintain the trading account. The sum is officially termed as “margin”, and thus leverage trading is also sometimes known as margin trading. The “margin” serves as the collateral for the leverage or borrowed funds. Your range of leverage will depend broadly on how much margin you can provide and maintain to keep your trading position active.
Let’s explain leverage trading crypto with an example.
Let’s say you want to open a high trading position worth $1,000 BTC but you can only afford $500 from your own share. In that case, you can sign up for leverage trading crypto to borrow 1x leverage and add another $500 to your trading portfolio. The amount of leverage will be calculated based on the amount you will deposit as your margin. This way, you will be able to open a big trade with $1,000 but without offering the entire share of the money from your own wallet.
Best part is, if the market takes an upward swing, you will be able to make huge profits as here you are trading on a “leveraged” or amplified trading position.
Long and short leverage trading in crypto
If you are not new to the trading world, you must have heard the old adage of buying when prices are low and selling when prices are high. This is exactly what long leverage trading crypto is made of. When the market is predicted to enter a bullish phase, you can opt for long leverage trading.
In short leverage trading crypto, a trader asks for leverage or borrowed funds to sell crypto. Then, as the prices take a dip, the trader buys them at lesser costs and makes a handy profit from the difference received.
Advantages of leverage trading crypto
Higher trading positions with less funds
This is the fundamental benefit of opting for leverage trading crypto.
Every ambitious trader aspires to scale up his/her trading portfolio. The task becomes more manageable if you are able to trade in larger positions- but that demands large-scale investments from your side. But, sometimes, it might not be viable for every trader to provide a sizable sum for trading. This is a major place where leverage trading crypto offers a mighty help to pump up your trading position so that you can garner greater profits- yet with limited sum from your own share.
Protection in bearish market
This is one of the most inspiring reasons to sign up for leverage trading crypto.
In leverage trading crypto you can opt for short trading that allows you to make profits even when the market is down. Crypto is an extreme high-risk market where you can end up with devastating losses in a bearish market as much as you can churn out dramatic profits during the bullish phase. In such a highly volatile situation, you need a backup that can protect your long trading positions when the crypto industry faces a crash or enters a correction mode.
We will wind up the article with a discussion on the risks and the risk management strategies of leverage trading crypto.
As mentioned above, leverage trading crypto can leave you with magnum losses if the crypto industry enters a bear phase. But, still there are some smart risk-management strategies that will help to ensure a comparatively safer experience with leverage trading crypto.
Start with little investment– You should always start with little investment when it comes to leverage trading crypto. According to experts, you should be ready to lose the amount you invest in crypto given the radical volatile nature of the industry. Thus, it’s better to start small.
Set stop-loss order– In stop-loss order, you will fix a specific time limit for the closure of the trade and your account’s trading activity will automatically stop once it reaches the pre-specified time period. This strategy helps to prevent excessive trading that might bring in more losses.
Cooling period– Do not make leverage trading crypto a regular trading activity. As it involves borrowed funds, you need to pay an interest rate and maintain a certain margin. The exchange will close your trading position if you are unable to maintain your collateral. However, before the exchange closes down your leverage trading crypto trading position , you will receive a margin call. The call serves as a warming bell and a reminder to supply more funds to your account to maintain the trading position.