What is leverage trading in crypto and why is it so popular among professional traders? Because it enables them to increase their profits without making a large investment.

If you’re interested in learning how crypto trading with leverage works, how to manage risks associated with this strategy, and what are its main pros and cons, keep reading.

Learn in This Article

  • What crypto leverage trading is
  • How it works
  • Pros and cons of leverage trading
  • How to manage associated risks
  • Leverage trading vs margin trading
  • Top crypto leverage trading platforms

What Is Crypto Leverage Trading?

Leverage crypto trading is a strategy that refers to borrowing funds from crypto exchanges. This strategy aims to increase the buying and selling power, i.e., to bring a higher profit to the investors who use it.

This strategy allows investors to trade with more funds than they have in their crypto wallets. They’ll be able to borrow 5–200x their balance, depending on the crypto exchange they use.

Moreover, investors can make short- and long-leveraged trades. The former refers to the decline in digital asset prices, while the latter is associated with the rise in the value of cryptocurrencies.

However, leverage trading also comes with certain risks, which is why it’s not intended for beginners. What’s more, many countries have special rules for this type of trading. For example, in the US, investors will be limited when it comes to crypto spot trading using leverage.

How Does Crypto Trading with Leverage Work?

How to leverage trade crypto? Investors must first deposit their initial capital — collateral. The deposit amount will depend on position size and leverage ratio. The ratio can stand at 10x, 20x, 100x, etc. The higher the ratio, the higher the risk of liquidation.

For example, if you use a 10x leverage, your position will be worth $10,000, although you’ll have only $1,000 on your account acting as collateral.

Investors will also have to maintain a minimum margin on their accounts. Namely, if the margin falls below the asset’s value, investors will have to deposit additional funds to avoid liquidation. This is why investors need to choose a leverage ratio that best suits their budget and trading goals.

As mentioned before, leverage allows investors to open both short and long positions. A short position refers to a decline in the value of a digital asset, while a long position refers to the belief that the value of a digital asset will increase. Both positions will allow investors to profit.

For example, if you open a short position and the price of the cryptocurrency you are trading with drops, you’ll be able to profit by repurchasing it at a lower price.

Example

Let’s say you want to open a short position with $10,000 and 10x leverage. This means you’ll have to borrow Bitcoin from a crypto exchange and sell it at the current price. In this case, your collateral will amount to $1,000. Now, let’s say that the price of 1 BTC is $40,000, and you decide to borrow and sell 0.25 BTC.

If the value of Bitcoin drops by 20%, its new price will be $32,000. This means that you’ll be able to buy back your 0.25 BTC for $8,000. In this case, you’ll have a profit of $2,000.

The same rule applies to long positions. If you open a long position with $10,000 and 10x leverage, and the price of BTC goes up by 20%, you’ll get a profit of $2,000.

On the other hand, if the price of BTC falls below your collateral, you’ll face liquidation. To avoid this, you’ll have to add additional funds to your account.

Pros and Cons of Leverage Trading Crypto

Investors can benefit from using leverage with crypto trading in the following ways:

Increased Potential Profits

Leverage trading can increase your profits. For example — if you use a 5x leverage with a collateral of $100, you can buy digital assets worth $500. What’s more, even small price changes in the crypto market can lead to high returns.

Ability to Open Long and Short Positions

You can also profit from both declining and rising markets. On that note, if you open a long position, you’ll profit if there is an increase in prices. At the same time, you can profit by opening a short position, if the value of digital assets drops.

Diversification

Leverage trading enables you to diversify your portfolio and thus further increase your chances for high returns. This strategy will also allow you to trade with a wider range of pairs.

The main disadvantages of leverage trading include the following:

– Risk of Losing Your Capital

Using this strategy is very risky as it can lead to liquidation — you could lose your whole capital if the value of digital assets becomes lower than your collateral.

– Fees

Crypto exchanges charge fees on their borrowed funds, which can become very large over time. On that note, in addition to paying maker and taker fees, you’ll have to pay opening fees, rollover fees, and liquidation fees.

– Not Suitable for Beginners

Trading with leverage requires knowledge and experience, so beginners may find this strategy very challenging.

How to Manage Risk When Crypto Trading With Leverage

There are several ways you can reduce the risks associated with leverage trading. First, you should never invest more than you can afford to lose — don’t invest more than 5% of your collateral.

Furthermore, you can use lower leverage. In fact, many crypto exchanges put limits on their leverages, which most often vary from 5x to 200x. So, choose the best crypto exchange with leverage limits that suit you best.

You can also use stop-loss orders. They will help you to close your position after you reach a specific price. These automatic orders are very useful during market movements. Likewise, more experienced traders can learn charting techniques to help them predict price movements.

And finally, if the prices of digital assets are lower than your collateral, you can avoid liquidation by adding additional funds to your crypto wallets.

Crypto Leverage Trading vs Margin Trading

Now that you know what leverage in crypto trading is, you should also know what distinguishes it from margin trading. That said, leverage trading can only work with margins, and the same applies to margin trading.

The margin is the term used for the initial capital that investors must deposit into their accounts to trade cryptocurrencies. Margin can also be seen as collateral that crypto exchanges require from their users as a prerequisite for borrowing their funds.

On the other hand, leverage is a term that refers to the use of borrowed capital that will help investors increase their profit or trading position. Leverage can also be explained as a tool that enables you to multiply your profits. Leverage is usually expressed with an X, which denotes a multiplier — for example, 10x — while margin is expressed as a ratio — for example, 5:1.

Top Leverage Trading Platforms

The most popular crypto leverage trading platforms are:

  • MEXC: Max leverage limit stands at 200x
  • Binance: Max leverage limit stands at 125x on BTC
  • Kraken: Leverage limits range between 5x and 50x
  • OKX: Leverage limits range between 10x and 20x under full liquidation mode and 1x and 100x under partial liquidation mode
  • Bybit: Max leverage limit stands at 125x on BTC

Conclusion

So what is leverage trading in crypto and how to take advantage of it?

Crypto leverage trading is an excellent strategy that can bring you high profits with minimal initial investment. However, this trading strategy also carries a lot of risk, which is why it’s not recommended for beginners. To protect your funds, you should never invest more than you can afford to lose. Furthermore, you can reduce the risk by using lower leverage and stop-loss orders.

Before you start crypto leverage trading, you should learn the basics of trading without leverage. This will help you gain more experience.

FAQs

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