What is Crypto Leverage Trading and How Does it Work?

2022-04-13, 09:59

What is crypto leverage trading? Crypto leverage trading consists of using borrowed funds, say from an exchange, to execute trades with a larger amount of money than what traders actually have. In exchange for the leveraged loan received, traders provide their actual money as collateral margin for the operation.

Risks in crypto leverage trading: Leveraged traders can win big, but also lose big. That’s because their actual trade value is the amount they have used as a collateral. If you are trading $100,000 dollars in leverage with $10,000 in your actual funds as collateral, that usually means the trade can only afford to go down 10% at most before you face liquidation and lose all your funds.

How to reduce risks when crypto leverage trading: Use stop-loss orders, profit-taking orders as well and make to do your part by studying the market. Crypto leverage trading can be fantastic for newcomers, but it comes at a cost for those that are taking too much risk.

There are several strategies available for those wishing to get started with crypto trading, some would say too many to even count. Within those strategies, we have different paths to conduct them according to each investors’ goal and risk appetite. One of these paths, for those seeking the maximum return possible, is through crypto leverage trading.

In this article, we go through the concept of crypto leverage trading and what makes it such an attractive option to investors across the world. It is also, by far, one of the more risky ways to trade assets - therefore, it must be handled with great caution and only by trading professionals.

What is crypto leverage trading?

Crypto leverage trading consists of using borrowed funds, say from an exchange, to execute trades with a larger amount of money than what traders actually have. In exchange for the leveraged loan received, traders provide their actual money as collateral margin for the operation.

Say as an example, that a trader called Bob has $10,000 dollars available for a trade in Bitcoin. He thinks the crypto is going to the moon very soon, and is extremely confident about his prediction. So confident, in fact, that he’s seeking to leverage his trade. He finds an exchange with up to a 10x crypto leverage service, which would turn his $10,000 into $100,000. He gets the leverage approved after he uses his own ten thousand dollars as margin for the operation. The exchange lends Bob the hundred thousand dollars to trade, while Bob’s actual $10,000 stay with the exchange as collateral.

In essence, that is what crypto leverage trading is; borrowing funds from an exchange or firm to trade at higher values while using your own funds as collateral. Sounds simple, and it is in theory. However, there are some risks involved that investors must be mindful of.

Risks in crypto leverage trading

The main risk involved in crypto leverage trading is the greatly-feared liquidation. We often hear about it in the news around crypto market analysis, especially after a recent dip or major crash. Among the root causes behind markets taking a downturn, liquidations seem to be at the center of it.

When you use your funds as collateral, it allows you to borrow the leverage from the exchange or firm - it does not mean that you can use those funds indefinitely, regardless of which way the market is pointing. Say the previously mentioned trade with Bob’s 10x leverage went well, and Bitcoin went up a full 10% in a single week. With the $100,000 dollars Bob got from his leverage deal, that would put him at a $10,000 profit before fees - the same amount he had at the start of the investment.

However, when the trade goes wrong, the situation is also extreme - to his disadvantage. Say that Bitcoin went down 10%, instead of going up. Since Bob had used $10,000 dollars as a collateral for a $100,000 trade loan, that means his order would now be worth only $90,000 dollars - a 10 thousand dolalr loss. But contrary to trading with your own money, there’s a limit to how low leveraged trades can go. Usually in this case, Bob’s trade would face liquidation - he would lose all his funds used as collateral and no longer have access to the amount lent to him by the exchange.

Here is why: Bob only had $10,000 dollars to begin with, which was used as the collateral for his leveraged loan. It essentially means that, during the 10x leveraged crypo trade, Bob could only afford to lose up to $10,000 dollars. Once it reached that amount, the 10% loss, he was promptly liquidated out of the trade and lost all his funds. It’s something that happens time and time again with unexperienced traders, so one must be extremely careful when deciding to pursue crypto leverage trading.
How to reduce risks when crypto leverage trading

Having a stop-loss order set in place will be your biggest ally when leverage trading; it prevents you from losing more than what you can afford. Once the crypto asset reaches a certain low, the order is activated and the funds are put to sell immediately.

The same goes the other way around, with take-profit orders; they make sure you are taking advantage from a recent market surge and are not left behind in case the price goes down again.

All things considered, crypto leverage trading can be a fantastic tool for newcomers who want to start trading, but don’t have the necessary amount to make a positively impactful mark on their finances. However, as the article has shown, it has to be conducted with extreme care and masterfulness. The profits can certainly be fast and large, but so can the losses.

How to start crypto leverage trading on Gate.io

The process is quick, simple and available for virtually anyone to get started.

1.Go to Wallet and deposit funds into your Margin account.

2.There are two types of leverage trading to choose from: cross, which base the chosen asset across all its markets, and isolated which focused on a specific pair (such as BTC/USDT).

3.Once funds have been transferred to the chosen account, click “Borrow” on your selected asset or pair.

4.You’re ready to trade!

Remember to make the repayment for the crypto leverage loan, which can be manual or set up to automatically withdraw funds from your account.

Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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