Entities such as Bitmex, Bitfinex, Kraken and even Poloniex allow you to conduct these trades where you can borrow money to make substantial gains.
Of course, it is not present on all entities or speculation hubs because they do not want to take on the risks that are inherent to the leverage game. Integrating leverage and rolling it out to everyone can increase risks for the exchange, for holders, and the general market. It is best to practice caution in this regard as a cryptocurrency investor and as a facilitator as well.
Yes, the cryptocurrency industry is now more advanced to where it enables users to use varying amounts of debt to bet on the rise or the fall of bitcoin. Yes, it is regulated to a certain extent, and it varies by the specific entity that you are on at that present moment. The main point here is to expect more regulation as more governments seek to curb activity or enhance stability in this sector.
People appreciate bitcoin and other digital assets because they have volatility. If you are trader, you will love volatility because you can make money when the price of bitcoin goes down and when it goes up.
Sophisticated bitcoin investors will ensure to turn a profit when the market is bullish and when it is bearish with cryptocurrency leveraged trading.
Of course, leverage is a blessing and a curse because it enables users to make money in a large way while also paving the way for their destruction. That is why people see borrowing to make more gains as a two-edged sword. It can work in your favor, or it can go in the opposite direction and affect you in a very negative manner. What can seem like paradise in the start can genuinely be a mirage, a trick, or an illusion and cause you to lose money.
Always practice caution when even thinking about leverage trading in crypto asset land. With that, let’s begin and learn about margin speculation.
All You Need To Know about Crypto Leverage Trading
Professionals view trading with debt as margin trading. But they may call it leverage trading as well. Essentially, it is the notion of borrowing money from others to control assets and increase gains in traditional assets and digital assets.
People turn to this method because they want to substantially improve their purchasing viability. For instance, they can have a dollar but control ten dollars worth of assets and realize profits therein.
If we were to take a cryptocurrency example, we would say that we have an account balance of 10 BTC, and you seek to place a ten to one ratio leverage trade. In such a scenario, you enter into a position of a 100 BTC. If the volatile market moves in your direction, you can gain ten times the value; but if it goes against you, it can increase the losses as well.
See, it is alluring because you have a small balance but still make a large impact. Please remember that margin trading is not stable; it is highly speculative, nuanced, and complex. It is not child’s play and should be treated as such. Recall that even professionals can lose significant amounts with leverage trading.
That is why a few entities might have restrictions on who can use this feature. They want to only let people who have more tolerance for risk to use the feature; they don’t want more novice people who have bad experiences. These companies have the right strategy because they do not want many people to burn themselves in the market.
For instance, did you know that Coinbase Pro is one of these entities that have more restrictions on who can use margin trading? Leaders at this entity make it to where you must be an accredited investor or at least have a larger portion of capital on hand to participate. Conversely, other leading exchanges are more free and will let you margin trade if you meet basic criteria.
Before we begin, remember to check if your platform automatically enables margin trading. You don’t want to be making these type of trades without being aware of it, right? Of course not! That is a rookie mistake and something you do not want to have in your history.
How Does Leverage Trading Work?
Different entities place varying limits on the largeness of the leverage one can take on to create stability in the markets. A few platforms allow users to go a bit crazy with options for one hundred times leverage on a few contracts.
Those are the limits, but remember that the leverage accessibility will also focus on the initial funds present in your margin account. Yes, they don’t offer leverage without anything from your end. You must make sure to start with a good portion of funds to have value. Recall that there is an initial margin, then the maintenance margin you must have to keep your trade going.
Let’s stop for a minute and think about this aspect.
Initial funds let you access leverage options while maintenance margin lets you top up your account and keep you within the right levels to let your trade exist. Next, some will charge some small interest on your margin.
Margin trading enables you to move with the market in two ways:
- Bet on positive price appreciation. When you are betting on a positive price movement and action, you can see a value increase. This is where you purchase and acquire a contract.
- Bet on a negative price spiral. This is where you go to the market and say you will sell an agreement, and then when the price goes down, you will acquire it again for much less.
So the initial margin will enable you to give the entity funds as collateral for the money you will get from the exchange. If you bet right, and earn money after your close your trade, you gain value and get your collateral back plus the money you make.
But if the fickle Mr.Market moves in a totally different direction, you lose, the entity will close your position and take your collateral at a certain price level. The price level they close you out at is called the liquidation price point.
You do not want to get liquidated!
Always do your research before making a cryptocurrency bet, but even more so when you are trading with leverage.
Benefits of Leverage Trading
Speculation with margin enables you to tame a bear market, capture value, and earn more profits. For instance, let us take on a specific scenario; you have 2 BTC on November 18, 2017, when it was running up in value. You think that it is going crazy will crash soon! First, good job on predicting the future.
Anyway, you sell it short with leverage trading and see that it is going up, you could have gotten closed out early! But if you went and opened one up during December when it went extra high, you would have made the right choice and earned massive profits. At the same time, being able to buy your bitcoin at much lower prices a month or two later.
If you timed it right and did a buy for bitcoin in mid-April when bitcoin was much lower, you could have had significant value. If you were to add much more leverage to your trading process, you could earn a substantial profit. If you did 10:1, it would be ten times higher.
Again, the maximization of value is what makes people lust after leverage.
Manage Your Risk
The truth is that using margin is not as simple as you would like it to be. There’s a lot of risks that you take on in the entire process, that is why you must manage your risk with a few points, a few of these are:
- Practice, Practice, Practice. There are a few entities that will enable leverage trading users to practice and become better while making it feel as if it is the real situation. If you are on a platform that lets you do so, please make sure to take advantage of it. As such, you can get to input orders, execute, and stop them in a practice environment. Practice before you start swimming with the sharks.
- One Tiny Trade, One Great Learning. Those that keep it simple from the start with margin trading will find more success. Why? Well, if you start with small amounts, you can learn from your mistakes and realize what not to do.
- Leverage up Over Time. Make sure to start with a small amount of leverage before scaling up. As such, you can get to know the markets, step in the fire slowly, and increase your risk level and potential over time.
- Concentrate on a specific Market. Don’t diversify your markets from the start. Instead, just choose one market, like ETH/USD to genuinely understand what you are doing, the market, and make the right trades.
- Order Comprehension. When implementing trades, you must genuinely comprehend the order status. Focus on the price or the cost section, and it will let you know the amount that you risk to gain value.
- Limit your Risk. Those who use limit trades instead of market trades when dealing with ethereum, bitcoin, or other assets will likely save money when starting a position. It depends on how the platform deals with it, but you would be better off in the long run in most cases.
- New to Leverage? Trade regularly in the digital asset industry before amplifying aspects with leverage.
Here are a few terms you must become aware of in your leverage process:
- Cost: The total potential loss of funds
- Starting Margin: The Margin you need to be in the trade
- Leverage: This is the amount of debt you take on
- Limit Price: the price that you will start at when you are beginning a trade.
- Liquidation: This is the point at which you would lose your funds.
These are some of the most important ones, and you will get to notice other terms as you fiddle with the platform.
The critical component here is that if you comprehend what you are doing you may possibly earn in the market with leveraging. If you don’t understand what you are doing, please stay away! Again, there is quite a bit of risk present within this field; as such, you must go ahead and always be diligent and cautious.
Nothing is guaranteed in life, and everything comes at a price. This is all the more so in digital asset land where events can turn on you quickly. That is why this guide is littered with words of caution; you can fall quickly into a situation where you do not want to be in when you borrow money.
But with all of that being said, we think that you get the gist of this concept. Remember to have fun!
Good luck with your trading endeavors, friends!