How Does Leverage Trading in Crypto Work?
The cryptocurrency market is now worth more than $3 trillion. Billions of dollars worth of crypto are traded on a daily basis. And with so much fluctuation on a day-to-day, and hour-to-hour basis, there is no shortage of profitable trading opportunities.
Many novice and professional traders alike focus full-time on cryptocurrencies, as opposed to stocks, forex, and other asset classes. It seems that many are making the most money by engaging in leverage trading.
Crypto leverage trading provides an opportunity for traders with almost any budget to make a meaningful profit, since leverage multiples the amount of crypto you can trade.
But what is leverage trading? Keep on reading to discover how this can be a powerful method to multiply crypto trading profits.
Two Main Types of Trading
When people are trading an asset on a short-term basis for profit, they are likely trading in one of two ways; non-leveraged trading or leverage trading.
Trading without leverage in the spot market is the most basic form of trading. This is when you actually purchase assets with the money you have in your account. The assets purchased can be a cryptocurrency like Bitcoin or something like stocks or foreign currencies.
You can choose to hold these assets in your account, or sell them and cash out at any time. Spot trading is frequently used by low-risk day traders, but it is more common with long-term, buy-and-hold traders who are investing rather than actively trading.
On the other side, we have leverage trading, otherwise known as margin trading, or trading on margin. Leverage trading crypto allows you to trade much larger amounts of the asset than you can afford on your own.
With leverage trading the broker will lend the money to make larger trades. All they require is for the person to put up a deposit, guaranteeing the funds.
If the price moves in the trader's favor, he/she can then sell the large position for some serious gains. The borrowed funds are then settled with the broker, and the trader keeps the oversized profit.
The only catch is that leverage can work against the trader, just as much as it can work in the trader's favor. Amplified earnings also mean amplified losses, in the event, the trader exits the trade at a loss.
How Does Leverage Work in Crypto?
So how does leverage trading work when trading crypto? It starts with signing up for the right broker or crypto exchange. Not all exchanges offer leveraged trading. The ones that do will offer different amounts of leverage. Some might offer 1:10 while others might go as high as 1:100 or beyond.
When you enter a leveraged trade, you are required to make a deposit. This deposit is known as your margin requirement.
If you enter a trade for $10,000 at 1:10 leverage, your margin requirement would be 10%, or $1,000. So you'll need to have a minimum of $1,000 in your trading account.
Once you open your position, these funds are locked up and cannot be used to open other trades, until you close your leveraged position.
Crypto Leverage Example Trade
Let's take a look at an example of how leveraged trading works in regards to crypto.
Say your trading brokerage allows leverage up to 1:30. Rather than use the maximum amount of leverage, you choose to use 1:20 instead, to play it a little safer.
You want to purchase $10,000 worth of Bitcoin, but you don't have anywhere near that amount. At 1:20 leverage, that means you only need to provide $500. This is your margin requirement.
You go long on Bitcoin, purchasing $10,000. Say the price increases by 5%, and you close your position at a profit. You would have earned $500 on that single trade.
Without leverage, you could've entered the same trade with just $500. With a 5% increase, you would've made $25. 1:20 leverage means you can make 20 times the profit you would normally make.
However, leverage is a double-edged sword. On that same trade, you could have lost $500 if the price decreased by 5%. Once your position decreases enough to wipe out your margin, your trade gets liquidated and you lose your entire balance.
Tips for Leveraged Trading
Should you use leverage your benefit? Here's what it takes to make leverage trading work for you.
Understand the Risks
Trading on margin can be risky. Never trade more than you're willing to lose, because every trader loses at some point or another.
Trade With Discipline
On each trade that you make, you should never risk more than 5% of your account balance. Many traders don't risk more than 1% or 2% of their account balance. So if you have $1,000 in your trading account, you shouldn't risk more than $50 on an individual trade.
Set a Stop Loss
Regardless of what type of trading you are doing, stop-losses are one of the most important tools you can use. This is especially true when trading on margin.
By setting a stop-loss, you can limit the amount a position can move against you. Stop-losses ensure your losses are never too big. This keeps your account safe from derailment by any single trade.
Trade on Paper First
Since trading with leverage is much riskier, you need to develop a trading method that works for you. Only trade with real money once you are confident in your technical analysis skills, and know-how to time your entries and exits. Use paper trading to simulate the experience of trading with leverage first.
Trade Like the Pros
Most new crypto traders go at it alone, and that's one of the biggest mistakes you can make. Thousands of people have gone before you, and many of them are willing to share their secrets and insights, to help improve the lives of others.
By joining a trading program, such as the Spiking Cryptos Trading Masterclass, you can learn from professional traders who have been where you are at. You can follow the systems and methods that they've already developed.
The Spiking Cryptos AI data platform curates all the wallets' data and presents it in an easy to read manner. By having these access to the same information that the highest-level traders have. You can see what top-performers are buying, and when they are selling, and decide if you want to follow their lead.
Make Leverage Trading Work for You
Leverage trading makes crypto much more profitable, for those with huge accounts and for newbie traders with tiny accounts. If you can learn to use leverage to your benefit, there's no limit to how much you can make in the crypto market each day.
Using tools like Spiking Cryptos AI, will drastically increase one's odds of making successful trades. Check out the upcoming Free Live Webinar to learn more on how you can start building your crypto wealth today.
Join the Spiking Wealth Community
Want to learn more about the various trading strategies and see which one suits you the best? Lead by Dr. Clemen Chiang, the Spiking Wealth Community is an online community network. Together we are catching the Spikes so that you have faith, hope, and love in everything you do. Spiking Wealth Community helps you to accomplish time squeeze by connecting the dots through online courses, live trading, winning trades, and more. Join us for Free and start your Spiking Wealth Journey today!
*Disclaimer: The article should not be taken as, and is not intended to provide investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Spiking strongly recommends that you perform your own independent research before making financial decisions.
