In recent years, cryptocurrency and blockchain has surged to the forefront of global economics, creating and providing a whole new exciting, highly versatile, and far more secure, way to do e-commerce.
Researching crypto, however, can be a tricky business with all its technical concepts and jargon. During your research on the internet, you may have come across the term leverage trading.
Though it can have varying outcomes and uses according to the type of market that it’s used in, this article will discuss its particular use and role in the trade of cryptocurrencies. Furthermore, because it’s all about risk, some general tips and advice will be included to help keep your assets safe. So, without further ado let’s find out all about leverage trading and what it means in the crypto sphere.
Leverage trading can sound incredibly technical when explained by an economist in all its detail. In reality though, it’s generally not quite as complicated as it may first appear.
In finance, leverage is a term that you will often hear mentioned with margin and margin trading, though these are often confused to mean the same thing.
Leverage generally refers to a loan that is provided by a broker to a trader on an exchange. This is often done during margin trading. Margin trading may involve trading with leverage; however, leverage is simply the instrument that enables it. Margin generally refers to assets that have a margin of risk and the collateral needed to balance it. Leverage trading, on the other hand, is similar, although it can refer to any type of trading that involves leverage, and not just margin trading.
In both cases though, leverage is used for a specific purpose, which is to help improve cashflow as well as a trader’s position in a trade or deal.
In general, leverage trading in crypto is very similar to that of conventional markets and stock trading. The only big difference is with crypto itself, which is a fully digital asset.
In crypto, leverage is generally used to increase the size of the trader’s portfolio and their trading position. This enables them to control and trade a larger amount than they would have otherwise.
However, trading with a loan poses a high level of risk. It can greatly amplify profits. However, it can also lead to compounded loss. Therefore, a certain amount of care, knowledge, foresight, and planning, is generally needed when utilising leverage trading.
As mentioned, margin trading is one of the most common types of trading that involves leverage. Another common type is Futures trading. This involves buying or selling an asset at a predetermined date in the future. Futures trading tends to be one of the risker trading methods, and usually involves higher leverage fees.
In addition to the above options, there are various other types of trading that also commonly use leverage. These include options-trading, swaps, and contracts for difference, or CFDs. All of these can technically fall under the banner of leverage trading whenever leverage gets put to use.
Though the ups and downs of leverage trading can differ according to the size of the leverage as well as the trade, there are various factors that generally remain true throughout all trading types.
Though leverage trading can be highly risky, there are also a few things that traders can do to effectively minimise it.
There are also a range of risk management tools that traders can use to help minimise loss. These include:
Generally, a combination of risk management and trading strategy is one of the most common and effective methods that experienced leverage traders will utilise. With a bit of self-control and foresight, the great potential of leverage trading can be unlocked and used to its fullest potential.
For your convenience, here are most of the commonly used technical terms in leverage trading, with simple definitions.
Crypto leverage trading is a potentially powerful tool in the right hands, which is the reason it is used so frequently. It is important for traders to know exactly what the risks are, however, before they start trading rather than later. Traders should always conduct a thorough risk assessment beforehand, weighing their means against the risk they may face, and choosing a suitable leverage amount where needed.
There are various risk management tools that can help. However, it is generally up to the trader to make sure that they make reasonable decisions that won’t lead to disaster and compounded debt.
Despite the inherent risks though, it is also very possible to play it safe with leverage trading, by not taking large loans or making unnecessarily risky trades. At the end of the day, the choice is all yours and will depend on how serious you are and what you aim to achieve. Remember though, luck usually will only get you so far. If you really want to profit in a big way, it’s far better to do your homework, spend some time studying and play it smart.
The amount of leverage that a crypto trader can get in a single loan is generally determined by the crypto exchange or broker that supplies it. However, the type of trading account that the trader owns can also become a determining factor.
Crypto leverage trading usually supports the same types of orders as conventional trading. These include marker orders, limit orders, and stop orders. Orders allow crypto traders to buy and sell at different prices. It also allows setting specific entry and exit points for trades.
The appropriate amount of leverage for trade will generally depend on a number of factors. First, the trader’s own risk tolerance must be assessed. After all, the last thing you want is to lose on a trade and not be able to pay back the loan. Next to assess is the volatility of the asset you want to trade for. Last but not least is the strategy you wish to employ. Once you have worked these three factors out, you will likely have a much better idea of the amount of leverage you will need.
Yes. Many crypto exchanges and brokers offer demo accounts that traders can use to practice with. These demo accounts will generally simulate the real market in every way, making them invaluable practice tools for traders.
Unfortunately, yes. It is possible to lose more than your initial trade amount. As mentioned, leverage trading will usually have additional fees. Adding to this though, there is the risk of movement in the market, which can seriously weaken your position. In worst-case scenarios, it can even result in liquidation or margin calls. Margin calls are when the broker demands a further deposit from the trader to cover potential losses.
