Leverage trading is a strategy used by crypto traders to increase their trading positions and potentially increase their profits even with a low initial investment. It involves borrowing funds to increase your trading position beyond what would be possible with your current account balance alone.
When you engage in leverage trading, you use borrowed capital to make your trades. Leverage is often expressed as a ratio, such as 2:1, 10:1, or even higher, indicating how much larger your trade is compared to your initial investment.
For example, if you have $1,000 in your trading account and use 10x leverage, you can open a position worth $10,000. If the market moves in your favor, you will profit as if you had invested $10,000 instead of the actual capital of $1,000.
Trading with leverage involves two key types of margin: the initial margin and the maintenance margin.
While leverage can magnify your profits, it also increases your potential losses if the market moves against you. The higher your leverage, the higher your losses, and even a small market movement against your position can result in significant losses. Your losses can even exceed your initial capital and cause the liquidation of your position if it falls below the maintenance margin requirement.
Leverage is also used when short selling, or “shorting.” Shorting is selling crypto whose price you expect to go down within the next few days, weeks, or months and making a profit by buying the same amount of crypto once the price falls. Certain exchanges allow you to buy crypto with leverage, sell it at the current market price, wait for the price to drop, and buy it back at a lower price. Of course, you will need to pay a fee to the exchange to facilitate the trade.
For example, let’s say the current market price of Bitcoin is at ₱3,000,000, and you expect it to go down after a month. You can open an account on a crypto trading platform and short sell ₱20,000 worth of Bitcoin. (Ex: ₱1,000 worth of Bitcoin as your collateral at 20x leverage allows you to open a position of ₱20,000.) The borrowed coins will come from the platform's liquidity pool. Sell the Bitcoin you borrowed at its current market price and wait for the price to drop.
If the price falls to, say, ₱2,500,000, you can then buy back the original amount of Bitcoin you sold and return it to the trading platform to close the trade. The difference between the original price at which you sold the crypto and the price at which you bought it back — minus the trading platform fee — is your profit.
Shorting comes with risks: if the price of the crypto asset goes up instead of dropping, you will end up losing money by having to buy it back at a higher price.
Because leverage trading requires waiting days, weeks, or months for the price of the asset to go down, you cannot short sell in a spot market.
In the crypto market, leverage trading often involves derivatives such as futures and options contracts. These financial instruments allow traders to speculate on the future price movements of cryptocurrencies without the need to own the underlying assets.
If you're looking for a crypto and derivative trading platform that offers up to 100x leverage, low trading fees, and a suite of features, you can check out KTX.finance.
KTX allows users to trade with up to 100x leverage with minimal fees. The platform allows users to choose the type of asset they want to use as collateral. For instance, if a user wishes to trade Bitcoin, they can use other assets such as USDT, ETH, or ARB, which will be supplied by the liquidity pool.
Leverage trading offers a way to enhance the potential returns on your crypto investments, but it's important to understand the risks involved and have a solid risk management strategy in place. This includes the use of stop-loss orders to limit potential losses. To fully maximize the benefits of leverage trading, always conduct thorough research and consider your financial situation and risk tolerance before making an attempt.
You can learn more about the ins and outs of crypto trading and investing here.
Happy trading, Ka-Bit!
