Crypto Leverage in Trading – All You Need to Know

It is the trading phenomenon of modern times, with traders flocking to cryptocurrency as a form of investment in recent years – but how can market movers make the most out of investing in digital currencies?

One potential option is exploring the concept of crypto leverage in trading, which could offer investors the chance to maximise profits and boost trading performance by increasing their overall purchasing power in the market.

Find out all the key details about how to leverage trade crypto, including what it is, how it works, and ways to guard against the risks involved with leverage trading bitcoin in this handy guide. Read on to discover more.

What is Crypto Leverage?

Leverage is a type of trading mechanism that investors use as a way to increase their exposure to the market by allowing them to pay less than the full amount of the investment made.

It is essentially the use of borrowed funds to increase a trader’s position beyond what would normally be available to them from just their cash balance alone.

Also known as margin trading, this method is utilised by traders in both the traditional and crypto trading markets in order to gain the maximum amount of profit possible.

However, it should be noted that leverage trading is a high-risk undertaking and one that can lead to extremely heavy losses. When it comes to beginner or less experienced traders, it is not advisable to opt for this type of trading until the risks involved are fully understood.

How to Leverage Trade Crypto

With regards to margin trading crypto, investors are able to contribute a percentage of the total order value. This is where leverage comes into play, as the increased buying power that it generates can allow a trader to gain access to larger sums of capital.

For example, if a broker offers a leverage rate of 1:100 for trading bitcoin, it means that for every $1 worth of bitcoin in their trading account balance, traders are able to control another $100 worth of the digital currency.

So, in this case, while leverage trading bitcoin allows a trader to take on much larger exposure, it also has the potential to magnify future profits, as outlined below.

If an investor deposits $1,000 worth of bitcoin to open a $100,000 position (with a 1:100 leverage), and the position subsequently moves into a 1% profit, there will be a gain of $1,000 or 100%. Conversely, without leverage, the gain on the same 100,000 investment amount would total just 1%.

Managing Risk

As mentioned earlier, crypto leverage can be a high-risk but also high-return investment. On the one hand, potential returns can end up being amplified, while on the other, trading losses can be very damaging, especially in the case of an unfavourable price direction.

When leverage trading bitcoin, ethereum or any other type of digital currency, losses associated with this mechanism can be very damaging for a trader’s portfolio, as their market exposure is increased. 

Margin trading can lead to losses that exceed the initial investment put up. Unlike regular trading, even a minimal drop in the market price can be amplified and cause serious and expensive trading losses. Here are a few ways to help guard against these risks.

Stop Loss

This is a risk management tool, enabling investors to essentially protect their profits. Stop Loss orders work by specifying a point at which a stock can be bought or sold, i.e. when it reaches a certain price, also known as the Stop Price. The moment this price mark is met, the stop order then becomes a market order and is typically executed at the soonest available opportunity.

Responsible Trading

It may seem like common sense, but this is an important – yet often overlooked – point. The crypto market is highly volatile and can go against a trader very quickly, especially when margin trading. Consequently, investors should never invest more than they can afford to lose, and should be ready to exit the market before the price goes south.

Take Profit

This is almost like the opposite of a stop loss, and is where a trader chooses to close their position when the profits hit a certain point or amount. For the same reasons that were outlined in relation to Stop Loss, the volatility of the crypto market means that it is wise to trigger a sensible sale point before any possible future downturn in the rate.

Negative Balance Protection

Another safeguarding method against major crypto leverage losses is to choose negative balance protection, which ensures that traders do not lose more than the outstanding balance of their account, even when the market moves quickly or gaps. It can prevent a trading account from moving into negative balance, even if there is a change in price direction.

Concluding Thoughts

As with any trading tools, leverage is something that needs to be properly understood and needs to be taken extremely seriously, in terms of the associated risks attached to it.

For those who are willing to take on a more hands-on approach to their crypto trading, leverage can play a part in a profitable trading strategy. Having said this, traders should be aware that the crypto market is characterised by high levels of volatility, and therefore, it is important not to get too carried away.

There are several risk management tools available to those who are keen to make use of leverage to increase market exposure, but the bottom line is that investors should never be willing to risk more money than they can afford to lose.