By Lucas Williams
2021 has seen an exponential increase in the mass adoption of cryptocurrencies. The rise of non-fungible tokens (NFTs) and decentralized finance (DeFi) and Bitcoin reaching new all-time highs has captivated everyone’s attention. The market capitalization of the entire crypto space exceeded $2 trillion, as of August 21st. A ton of day traders were attracted to the space due to a tsunami of trading volume, which means more and more people want to use leverage for making maximum gains. The huge trading volumes in the crypto market have also caused many traders to experience FOMO (fear of missing out) on potentially high profits from trading cryptocurrencies.
It is because of this fear that a number of traders have decided to borrow funds from brokers in order to increase their buying power for the purpose of amplifying their gains. This phenomenon is defined as margin trading or leverage. Margin refers to the funds that are borrowed from the broker for the purpose of buying digital assets. Even if you have low initial investment, leverage trading gives you the opportunity of trading without having to invest more and still be able to multiply your profits and losses, which also involves higher risk.
Crypto Trading on Margin
You can increase your buying power as well as potential profits through margin trading or by using leverage, as long as you make successful trades. Thanks to margin trading, you are free to borrow money and trade more than you would be able to do if you were only using your own funds. Nonetheless, you should bear in mind that there is also the risk of you losing all funds if the trade doesn’t go in your favor.
When you are trading with borrowed funds, there is already an inherent risk and when you add margin trading in the volatile crypto space, the risk increases exponentially. Therefore, crypto traders should exercise caution and learn to manage their risks via hedging and other strategies. You should be adept in using technical analysis and identifying market trends. Moreover, trading crypto with a margin also provides you an excellent opportunity for increasing profits.
How Leverage Trading Works
Leverage trading begins when the trader deposits some money for borrowing funds. For instance, if you want to make an investment of $5,000 in a 1:10 ratio, then you only have to deposit $500 for opening a position. However, traders have to have enough funds in their accounts that are classified by the lending platform as collateral. There are 2 types of open positions available, short and long. Traders open the former position if they believe the digital assets’ price will fall and the opposite is true for the latter. When you are trading short, it means you are borrowing Bitcoin rather than cash.
Hence, if the price falls, then you can purchase the same Bitcoin at a lower price, return the BTC you borrowed from the lender and keep the profits. If you are successful in your long trade position, your initial cash deposit, as well as your profits will be released by the lender. If you lose your trade, your position is liquidated and the broker keeps the money. It is possible to use lower leverage for reducing the risk of liquidation. A number of platforms offer you the option of 100:1 leverage, but it is not always wise to use this much.
Where Can you Trade Crypto with Leverage
As the trading volume in the crypto sphere has experienced exponential growth, there has been an increase in demand for crypto exchanges that support leverage trading. A number of exchanges have been founded this year, which specialize in crypto derivatives trading. Before you begin trading live assets, you should bear in mind that margin trading can compound your profits as well as losses. Learning risk management strategies and technical analysis on a demo account before using real funds is highly recommended.
Leading crypto venture capital companies, such as Binance, back the FTX Cryptocurrency Derivatives Exchange (FTX). It is best known for its low fees and innovative trading instruments. Another option to explore is Bybit, which only focuses on crypto derivatives and boasts some of the most innovative charting features. It is regarded as one of the most popular trading platforms.