What is Leverage in Crypto Trading? – A Complete Overview 2023

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Crypto trading appears to be the latest sport on the block, where everyone and anyone can easily become a crypto investor with very little capital. This is possible because the crypto market encourages participation irrespective of the investor’s capital. To help investors augment their capital and participate in trading activities, the crypto ecosystem provides “Leverage.” 

This review delves into all the intricacies of leverage in Crypto trading. From its definition to its structure, types, calculation ratio, benefits, and risk, this review answers the question, “What is Leverage Crypto Trading?” Dive in to get all the details.

What is Leverage?

The term “Leverage” is not exclusive to the Crypto market. It is a financial term for using borrowed capital for investments or projects that enhance equity.

Leverage in the crypto market is designed to multiply returns and risks. If investors play their cards well, leverage can multiply their Crypto returns to as high as 100x their initial capital. More details are discussed in the subsequent sections.

Definition of leverage and its role in crypto trading

Leverage in crypto trading is a tool to enhance an investor’s buying or selling power, especially when starting with limited capital. Many successful traders have judiciously used leverage to take calculated risks based on clear market opportunities.

In Crypto trading, traders use leverage to magnify position sizes and their potential profits. Leverage also improves capital liquidity, allowing traders to maintain positions with less collateral. Thus, this allows traders to allocate resources to other investment opportunities.

Understanding how leverage amplifies trading positions

Leverage in Crypto Trading has become a trending topic because it offers many investors the advantage of starting with less capital and the potential for higher returns in a single trade. On some platforms, traders can get leverage as high as 1:100.

A leverage of 1:100, for example, implies that a trader with $100 can use 100x the initial capital to access a Crypto asset worth $10,000. A leverage of 1:100 amplifies the investor’s trading position by 100x. 

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How Leverage Works

Leverage undoubtedly has many advantages; however, it has risks. It is a “double-edged sword,” with each side weighing equal and opposite risks and benefits.

Leverage can be applied to long and short positions, where a long position anticipates a price increase, while a short position predicts a price drop. The flexibility of the Leverage offering on Crypto platforms caters to individual traders’ needs.

To trade with leverage, traders must first deposit funds as collateral, reflecting the leverage and position value the trader is aiming for. For instance, a $1,000 crypto investment with 10x leverage requires $100 as collateral.

For example, a $5,000 Ethereum investment with 10x leverage in a leveraged long position requires $500 as collateral. Based on the “double-edged sword” scale,  if the price of Ethereum increases by 20%, the trader gets a $1,000 profit (minus fees). Conversely, a 20% drop in price will trigger a liquidation due to insufficient collateral.

In a leveraged short position, a $5,000 short position on BTC with 10x leverage requires $500 collateral. Based on the “double-edged sword” scale,  if the price of BTC falls by 20%, a $1,000 profit arises. However, a 20% BTC price increase demands more funds for collateral to avoid liquidation.

Explanation of margin trading and borrowing funds from the exchange

Leverage trading is a form of margin trading where investors use borrowed funds to trade financial assets. “Margin” is the collateral deposited with a broker to cover the credit risk. Hence, margin accounts are required for leverage trading. The broker charges interest on the loan to make its profit, and where the investor makes a profit, the proceeds pay off the loan. This is essentially what margin trading is about. If you are concerned about your investments, we recommend you allocate a proportion of your portfolio into penny stocks. Check out the Best Penny Stock Apps 2023 and see what works best for you.

Calculating leverage ratios and margin requirements

As with traditional banks, crypto exchanges use a leverage ratio to determine the collateral (margin requirement) and the investor’s ability to pay back. The leverage ratio is a financial measurement tool to assess the investor’s ability to meet the required financial obligations. These ratios are important in Crypto trading because they provide insights into an investor’s financial health. The same applies on the Best Free Stock Apps 2023 – Pros & Cons.

Common leverage ratios include;

• Debt-to-Equity Ratio
• Equity Multiplier
• Degree of Financial Leverage
• Consumer Leverage Ratio

Depending on the crypto platform, any of these Leverage ratios can be used to decide the margin requirements. Before signing up on any platform, read the terms and conditions of their margin requirements. This is equally important in signing up on the any of our top 10 Best DeFi Apps 2023 Revealed!

Perpetual Swaps and Futures

With the recent popularity of the question “What is leverage in crypto trading” cryptocurrency derivatives, such as perpetual swaps, futures, and options, have also gained more popularity among crypto traders. So, let’s briefly discuss these crypto derivatives.

Perpetual swap allows traders to speculate on cryptocurrency price movements for as long as they want, without any time restrictions. On the other hand, futures are an agreement between two parties to exchange an asset of a predetermined price at a predetermined date. So, unlike perpetual swaps, futures have an expiry date.

Understanding perpetual swaps and their relation to leverage

Perpetual swaps allow traders to take long or short positions in an underlying cryptocurrency. Like futures, it offers traders additional flexibility, such as leverage, so they can settle contracts without owning the underlying asset. Perpetual swaps can continue as an indefinite leverage position, provided traders have sufficient margin to cover losses and avoid liquidation.

Explaining leverage in futures contracts

Future contracts are leveraged so that traders can control a larger market exposure with a smaller margin deposit. As with leverage in Crypto trading, this increases the potential for both profits and losses in future contracts. Traders also have the flexibility to take long and short positions depending on market predictions and can use futures contracts to hedge against risk in other markets.

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Exchange-Specific Leverage Offerings

High-leverage brokers enable traders to buy and sell Cryptocurrencies without needing to cover the full value of the position. This section discusses 5 high-leverage brokers. Read on!

Comparison of leverage options across different crypto exchanges

Here’s a comparison of leverage options offered by crypto exchanges:

Pros and cons of using high leverage vs. low leverage

Remember we described leverage in crypto trading as a “two-edged sword?” Here are more details on the pros and cons of each leverage position.

Pros and Cons of High Leverage:

Pros and Cons of Low Leverage:

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Benefits of Leverage in Crypto Trading

We have repeatedly answered the question “What is leverage crypto trading” in this review by discussing the many benefits of leverage in crypto trading. Here is a more detailed explanation of its benefits:

Leveraged trading for potential higher returns

As earlier mentioned, one of the most popular responses to the question “What is leverage in crypto trading?” It is “the potential of leveraged trading to amplify a trader’s returns by allowing the trader to control a larger position with a relatively smaller amount of their capital. Let’s use a scenario to describe how this happens.

You have $1,000 in your trading account, and you want to trade Cryptocurrency worth $20. Without leverage, you will only be able to buy 50 units of the Cryptocurrency, and if its price increases by 20%, your total investment will be worth $1,200, resulting in a profit of $200. On the other hand, with leverage of 1:10, you can effectively control a position worth $10,000, that is $1,000 of your initial funds and $9,000 from the broker). With this new capital, you will be able to purchase 500 units of Cryptocurrency worth $20. If the price of the crypto increases by only 10% to $22 per unit, your total investment is now worth $11,000. After repaying the borrowed $9,000 to the broker, you will have $2,000, with a profit of $1,000.

Access to increased market exposure with limited capital

Using leverage in trading provides a means to access increased market exposure with limited capital. This strategy offers traders the following advantages

• Exposure to larger positions with a small amount of capital.
• Diversification of limited capital to various aspects of the crypto market
• Optimization of trading strategies
• Cost efficiency and savings
• Flexibility in position sizing

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Risks and Considerations

As a “two-edged sword,” leverage in crypto trading comes with significant risks. Thus it requires careful consideration. Your consideration of the risk of leverage trading in the crypto market should include the following sections:

Exploring the risks associated with trading on leverage

Utilizing leverage is undoubtedly a swift method to amplify your earnings in trading. But it doesn’t end with profits alone. Here is a list of risks associated with leverage in crypto trading:

• High-Risk, High-Reward: Leverage trading in crypto is characterized by the potential for substantial gains but also substantial losses. The amplified returns can be enticing, but the flip side is that even small price movements can lead to significant financial setbacks.
• Speculative Market Nature: Many markets that allow leverage trading, especially in the crypto space, are speculative as the traded currencies may lack a long history or established fundamentals.
• Volatility of Crypto: Cryptocurrencies are renowned for their extreme price volatility. Thus leverage amplifies the effects of these price swings.

Understanding the importance of risk management

Effectively managing the risk associated with leverage in crypto trading is key to staying above the market’s volatility. It is crucial in helping traders assess their trading abilities and risk tolerance, this way, they can opt for ideal leverage ratios and maximize risk management strategies.

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How to Use Leverage in Trades

This is the most popular question next to “What is leverage in crypto trading?” It’s not as complex as it may seem, especially in an ideal crypto exchange platform like eToro. Take a look.

Step-by-step guide on placing leveraged trades on exchanges

Here’s a step-by-step guide on how to place leveraged trades on a crypto exchange platform.

• Step 1: Sign up or log in to your account
• Step 2: Deposit funds into your account
• Step 3: Open and transfer funds to your margin wallet
• Step 5: Choose a trading interface and access margin trading
• Step 6: Select a crypto pair and configure the trade
• Step 7: Place Trade

Easy peasy!

Setting stop-loss and take-profit levels for leveraged positions

Stop-loss and take-profit are essential tools for leverage trading. A stop-loss is a limit order that helps you limit potential losses by specifying a price you’re willing to exit a trade. On the other hand, a take-profit order locks in profits by automatically closing the position at a specified price level.

Strategies for setting these levels include:

• Placing SL below support and TP above resistance levels when shorting, and vice versa when longing.
• Using indicators like Average True Range (ATR) to place SL and TP at points, the market is unlikely to reach.
• Setting SL to limit a specific percentage loss of your capital and TP to ensure the profit outweighs the potential loss.
• Utilizing indicators like RSI, Moving Averages, and Bollinger Bands to determine SL and TP levels.

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Strategies for Leveraged Trading

Every action in trading has specific strategies to achieve maximum results. Thus strategies for leverage in crypto trading are discussed in subsequent sections.

Trading strategies specifically designed for leveraged positions

These strategies include:

• Range Trading: This strategy involves identifying a range in which a cryptocurrency’s price fluctuates and making buy/sell decisions based on that range.
• Trend Trading: Using technical analysis, trend trading focuses on capitalizing on market momentum by determining the overall trend direction.
• Breakout Trading: This strategy involves entering the market during increased volatility or sentiment change.
• Gap Trading: This occurs when a price moves sharply up or down, leaving gaps in the price chart. Traders observe these gaps from the previous day and look for opportunities between the gap and the opening range of the next day.
• Scalping: This involves executing very short-term trades with small price movements.

Diversification and risk mitigation in leveraged trading

Risk mitigation and mitigation are crucial concepts in leveraged trading. Diversification involves spreading one’s trading capital across different assets or strategies to reduce the impact of a poor-performing asset on the overall portfolio. In leveraged trading, diversification mitigates risk by ensuring one’s trading capital is not lost in a single trade.

On the other hand, risk mitigation strategies are used to protect one’s capital and limit potential losses. Key risk mitigation strategies include isolated margin, proper position sizing, monitoring short ratios, and assessing market sentiments. These are some key factors we considered in highlighting the 8 Best Crypto Presales in September 2023.

Leverage and Its Impact on Volatile Markets

There are a myriad of implications of leverage in crypto trading. From amplified profit or loss, depending on the market’s movement to possible liquidity, here is a breakdown of the impacts of leverage in volatile crypto markets.

How leverage can amplify gains and losses during market fluctuations

Leverage amplifies gains and losses in the crypto market by allowing traders to control a larger position size with a smaller amount of capital. When the market moves in the direction that favors the trader, leverage magnifies their profits. For example, with 20x leverage, a 1% price increase would result in a 20% gain on the trader’s invested capital.

However, the same principle applies to losses. If the market moves against the trader’s position, leverage magnifies the losses. In the example above, a 2% price decrease would lead to a 20% loss on the invested capital.

Tips for navigating high volatility when using leverage

As a novice or experienced crypto trader, everyone needs tips to navigate high market vitality. These tips include:

• Determine your risk tolerance.
• Calculate your position size based on your risk tolerance and the leverage ratio.
• Set stop-loss orders to limit potential losses.
• Diversify your investments to spread risk across different Cryptocurrencies.
• Use lower leverage ratios.

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Long vs. Short Leverage Trading

Going long means you expect the price to increase, similar to buying a cryptocurrency and benefitting from bullish markets. On the other hand, going short involves anticipating a price decrease, equivalent to selling the cryptocurrency. The long and short position concept allows traders to bet on price movements without owning the asset. More details are discussed below.

Understanding the implications of long and short leveraged positions

Long and short positions are opposing in nature. Stereotypically, bears (those going short) tend to be more conservative, while bulls (those going long) are more willing to take risks.

Short trades generate profits when betting against a cryptocurrency’s price increase. This can be done by selling the cryptocurrency and buying the quote currency, like fiat or another crypto. Traders are short when they anticipate a price drop.

In bullish markets, traders look to go long. This involves opening positions that benefit from price rallies. With long leveraged positions, wealthy investors, who know what is leverage in crypto trading, may use a buy-and-hold strategy to buy during dips and sell during surges.

Pros and cons of each strategy in different market conditions

Do you want to see the implications of the leverage positions in different market conditions? Here, take a look.

Long leveraged Position in bearish market

Short leveraged position in bullish market

Leverage in Crypto Trading – eToro Complete Guide

Do you want to move from asking, “what is leverage in crypto trading” to trading leverage in crypto? Here is a step-by-step guide on how to open an account on eToro:

1. Go to the eToro website and click on “Create an account.”

2. Provide personal information like username, e-mail address, or register with social accounts like Facebook and Google.

3.  Review the terms and conditions, then proceed if you are okay with them.

4. Click the “Create Account” button.

5. Verify your e-mail.

What is Leverage in Crypto Trading? – Conclusion

Leverage in crypto trading is the in thing; however, you need to get well-schooled on trading strategies on an ideal trading platform to make a good profit. With the many benefits of leverage crypto trading on eToro anyone can make a premium profit.

Trading cryptocurrencies on eToro is quite straightforward. Little wonder its our top Best Free Stock Apps 2023 – Pros & Cons. With the platform’s trading tools you will know what is leverage in trading crypto, so you can place market or limit orders, set up trading pairs, monitor the market’s movements and make more profits. Sign up now and you will be glad you did.

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