Cryptocurrency trading carries loads of possibilities to take advantage of the assets’ highly-volatile nature and profit from their constant price fluctuations.
Spot trading might be the most straightforward type of crypto trading, but once crypto enthusiasts get the hang of it, they usually like to venture into more advanced trading methods, such as leverage spot trading, margin trading, and futures contracts – all of which use leverage as a core feature to let you amplify potential returns.
In this guide, we’ll learn exactly what leverage trading is and how to leverage trade crypto with minimum risk.
Crypto Leverage Trading
The term leverage in crypto trading refers to a financial lever that can help you elevate your trading positions and potentially earn more profits. Leverage is an advanced trading tool available on numerous popular crypto exchanges that lets you engage in trades with considerably more assets than your initial deposit.
Essentially, crypto exchanges act as brokers that offer loans to users, but you can only use these loans for leverage trading. To get a leverage loan on a trading platform, you need to deposit a certain amount of collateral in some of the leading cryptos, such as Bitcoin (BTC), Tether (USDT), Ethereum (ETH), or other stablecoins.
On most exchanges that support leverage trading, you’ll find separate leverage fund sections in your account where you can view the assets you can spend on leverage trading. For example, on Binance, you can only borrow, access, and manage your leverage funds through the Binance Margin or Binance Futures sections of the Binance app.
When you take out a loan for leverage trading, you can engage in trades of a much higher value than your collateral. Some platforms offer up to 100x leverage. This means that if you deposit 1,000 USD as collateral, you can engage in a trade worth 100,000 USD and potentially earn 100x profits.
Long vs Short Crypto Leverage Positions
Users can open long and short trading positions when using leverage.
A long position implies that you’re estimating that the price of a specific asset will increase in the future, so you’ll buy low and sell high to profit.
Short selling crypto, on the other hand, means that you’re skeptical of an asset’s future performance and you estimate that its price is going to decrease in the future. To short crypto, you need to sell a specific coin at the current market price and then buy back the same amount of that coin once its price falls. When shorting crypto, you’re selling high and buying low.
What Happens When a Leverage Trade Goes Bad?
Margin refers to the fee threshold for maintaining an open leveraged position. If you can’t pay your fees to maintain your trading position, your position gets margin called, and the platform automatically liquidates it to prevent further losses.
This way, the platform prevents you from losing more money because that money actually belongs to the platform. If you only deposited 1,000 USD as collateral, you’ll lose those funds, but if the platform doesn’t liquidate your position, they can lose much more.
That’s why in times of high Bitcoin volatility and price falls, many leveraged trading positions get liquidated, and the market sees millions of dollars worth of BTC getting converted to fiat money.
Leverage trading can amplify your potential gains, but it can do the same with your potential losses, too. Does this mean you can go into debt if you lose a trade? The answer is no.
There’s no danger of going into debt because if your position gets margin called, you’ll simply lose your collateral, and the exchange will close the trade without charging you extra money. The fact that the platform doesn’t really give you money means that you can’t just decide to take out a leverage loan and then cash out those assets.
This means that when your leverage trade of 100,000 USD fails, you’ll only lose the collateral of 1,000 USD instead of going into a 100x debt of 99,000 USD. The only way to prevent a margin call liquidation is to sustain the position by depositing additional funds.
You can do this if you’re confident that the price of the underlying crypto will sooner or later move in your preferred direction. However, sustaining unprofitable leverage positions over an extended period can lead to much higher losses that will exceed your collateral.
On the other hand, if you manage to profit from your leveraged position, you just need to repay your loan and a small interest rate to the platform, along with the additional interest and the eventual fees you had to pay to keep the position open.
Spot Trading and Leverage
Spot trading generally doesn’t support leverage, which is what makes it far less risky than margin trading or futures contracts. However, due to the popularity of leverage trades, many exchange platforms have included leverage options on selected spot trading pairs, typically when trading liquid pairs.
For example, Binance supports up to 10x leverage on the BTC/USDT spot trading pair but doesn’t offer leverage options for DCR/USDT since this trading pair has lower liquidity.
Leverage options on spot trading pairs are also much lower compared to margin and futures trading. You won’t find 100x, 50x, or even 20x leverage options for a spot pair. High-leverage options are only available in margin and futures trading sections.
Margin Trading and Leverage
While some platforms offer limited 3x to 10x leverage for selected spot trading pairs, the main use case for leverage is margin trading.
The term margin comes from the stock market and refers to the maintenance threshold of your leveraged position, which is defined by your collateral. If the value of your position changes in the wrong direction, exceeding the value of your collateral, the platform will liquidate and close your position unless you increase your collateral.
In margin trading, traders use borrowed assets to enter 10x, 50x, or even 100x leveraged positions on some exchange platforms. Users can invest small amounts of money and amplify their potential returns manifold.
The trick is that users need to pay margin fees to avoid getting liquidated if the trade doesn’t work out as planned, but they still think it might go through at one point. Likewise, depending on the platform, traders might need to pay fees anyway to keep their position open.
Beginners are usually advised to stay clear of margin trading before they master spot trading and learn how the crypto market works.
Popular exchange platforms only support margin trading with trending, reputable cryptocurrencies. You won’t find micro-cap coins for margin trading among their offer because they are simply too volatile, and margin trading with those coins would be too risky for traders to even consider it.
That said, margin trading, in general, represents a high-risk type of trading because of the possibility of losing your collateral in case of a margin call. However, experienced traders can mitigate their risks by conducting technical analysis and estimating the price change direction of the cryptos they’re leverage trading.
Futures Contracts and Leverage
Futures contracts, popularly referred to as futures trading, essentially allow users to bet on the price change direction of a specific underlying asset. Futures trading is considered one of the riskiest types of crypto trading options and includes the highest leverage, often over 50x.
In futures trading, users don’t need to buy and hold a certain cryptocurrency. Instead, they are entering contracts regarding the future price movement of the underlying asset. These contracts often use stablecoins as collateral.
When a trader wants to enter a futures contract, they need to set an expiration date for the contract and a specific price threshold they estimate the asset will surpass or stay under at the time of the contract’s expiration. If the trader’s estimate is right, their contract becomes profitable, and they gain the amount of collateral deposited, along with the profits amplified by the leverage.
The expiration date of a futures contract means that the trader is obliged to automatically sell the contract at that point. Depending on the terms of the contract, the trader will gain profits or realize losses.
Some platforms allow users to set manual expiration dates for their contracts, while others support fixed daily, weekly, or monthly contract options. Also, some exchanges support perpetual futures contracts without expiration dates. Perpetual contracts can stay open for as long as a trader wants, but they’ll need to pay fees regularly to avoid the contract’s closure.
Leverage Trading Examples
Let’s have a look at two simple examples of using leverage in margin trading to amplify your potential returns.
Let’s say that you want to enter a long position on Ethereum, which means you’re putting money on the probability of a potential price increase of ETH. You wish to open a trading position worth 100,000 USD with 10x leverage.
For this, you’ll have to provide 10,000 USD as collateral before the platform approves the 100,000 USD leverage trading loan. Your desired outcome is a price increase of Ethereum in the following period.
If ETH’s price jumps 10%, you’re looking at a 10,000 USD profit because your position is now worth 110,000 USD. Once you sell the position, you’ll have 110,000 USD. You just need to repay the 90,000 USD loan with interest, and you’ll get your collateral back, along with the 10,000 USD profits.
You’ll earn considerably more this way than simply buying 10,000 USD worth of ETH and selling it after a 10% price increase.
However, the risks are extremely high because if the price of ETH decreases by even just 10%, your position will be liquidated unless you pour in more cash to sustain your trade. Your maneuvering space is the amount of your collateral. A price decrease that’s equal to or higher than your collateral will trigger a margin call.
If you’re convinced that the price change direction might soon turn in your favor, you can deposit more collateral to keep the trade open.
Let’s say that you want to short crypto and put your money on a potential BTC downtrend. You can open the trade with 50,000 USD and 50x leverage, for which you’ll need to provide 1,000 USD as collateral. At the time of opening the short position, we’re presuming that one BTC is worth exactly 50,000 USD.
Once you provide the collateral, you’ll get your Bitcoin loan to buy the asset and then sell it immediately. You’ll now have 50,000 USD in your margin account, although you only deposited 1,000 USD as collateral. Next, you need to monitor the market, and if the price of BTC falls 10% to 45,000 USD, it means you can purchase back the 1 BTC you sold and earn a profit of 5,000 USD. You can pay back the loan and keep the profits.
However, if the price of BTC increases by just 2% to 51,000 USD, you’re position will be margin called because you only had 1,000 USD as collateral.
These two examples of leverage trading show how traders can reap larger profits compared to standard spot trading without leverage. Because of the potentially high profitability, many beginners might want to try leverage trading straight away. However, this type of trading is extremely risky, and you shouldn’t use it unless you’ve mastered the essentials of technical analysis.
Benefits of Leverage Trading
- You can amplify your potential profits anywhere between 2x and 100x, depending on the exchange platform you’re using.
- You can start earning considerable profits with modest sums of money as collateral.
- Leverage trading crypto can be much more profitable than using leverage on the stock market because crypto prices fluctuate considerably more than stocks.
- You can benefit from micro price changes when leverage trading because the leverage amplifies your returns. With spot trading, you need to wait for considerable price fluctuations to earn reasonable profits, which can take days, weeks, or even months.
- If you’re proficient with technical analysis and know how to analyze crypto price charts, you can use leverage trading to make huge profits in a short period of time.
Risks of Leverage Trading
- Using leverage to amplify gains is very attractive to crypto newcomers, but you should definitely stay away from this type of trading until you master spot trading and tech analysis because if you don’t know what you’re doing, you can lose money fast.
- If your leverage trade doesn’t go as you planned, you can quickly face liquidation and lose your collateral.
- If you want to maintain an open leveraged position, you need to pay additional sums as collateral, and if your trade continues testing the margin, you can end up paying loads of cash and still losing your collateral.
- Just like spot trading, leverage trading can become psychologically addictive, and you might get tempted to pour in additional funds to try and recover assets lost in unsuccessful trades. This is one of the quickest ways to lose high amounts of money. You should only use funds you’re prepared to lose in leverage trading.
How to Minimize Risks While Leverage Trading Crypto?
As seen above, leverage trading carries various risks that can all lead to major financial losses. There are several things you can do to minimize your risks:
- Beginners should first concentrate on learning technical analysis. Analyzing price charts and price trends and accurately estimating the future price moves of your target asset is critical for successful leverage trading.
- Once you start leverage trading, taking advantage of stop-loss and take-profit trading orders is important because they’ll save you from losses and help you capitalize on short-term price movements.
Every time you engage in a leveraged trade, you should set up a stop-loss limit, i.e., the asset price at which you’ll automatically close your position and sell assets at a loss. The goal of this feature is to help you prevent dramatic losses.
At the same time, you should set up a take-profit order, which signifies the point at which you’ll automatically close your trade and collect your profits. You should avoid being greedy and ensure you’re setting reasonable thresholds for each order.
- Also, you should set up a strict plan regarding how much of your available funds you’re prepared to allocate for leverage trading. For example, if you allocate 5% of your monthly leverage trading fund for each trade, you can engage in 20 trades per month.
- Finally, a lot of exchange platforms allow users to try demo accounts for leverage trading. This is called paper trading. This way, you can practice using leverage to see how it works and whether you’re prepared to trade with real assets.
Popular Exchanges for Leverage Trading
Many leading trading platforms offer a variety of crypto leverage trading options. Let’s check out some of the most reputable exchanges that offer such services.
Binance supports over 350 cryptocurrencies, and it’s the leading trading platform in the crypto world. Apart from instant buying and spot trading, the exchange also has a margin and derivatives trading section, including futures contracts.
Most crypto exchanges don’t support leverage trading for spot asset pairs, but Binance isn’t one of them.
You can trade numerous spot pairs with up to 3x leverage. If you navigate to the margin trading section, you can go long or short on various coins with up to 5x leverage, while futures contracts are available with up to 20x leverage.
Binance supports stablecoin-collateralized futures contracts and crypto-collateralized futures contracts. Before using futures contracts, Binance users need to pass a short quiz to ensure they understand how futures contracts work and the risks of such high-leverage options.
ByBit is the market leader among platforms focusing on crypto derivatives and leverage trading. The spot trading section on ByBit supports 10x leverage on more than 30 leading digital currencies. However, the margin trading section is where ByBit has the most to offer, with more than 60 tokens with 10x leverage.
In the crypto derivatives section, ByBit has various options for users to enter leveraged trades. Users can enter futures contracts on all the cryptos supported in the margin section, with up to 100x leverage on some tokens.
Also, ByBit offers stablecoin and altcoin-collateralized futures contracts with fixed expiration dates, as well as perpetual contracts.
It’s worth noting that ByBit offers leverage traders various additional order types and services that you won’t see on most competitor exchanges. For example, you can set up your derivatives trading bot and leverage preference. The bot then automatically conducts trades on your behalf. Still, keep in mind that bots are also a high-risk service that needs human supervision.
KuCoin doesn’t support any leverage options for spot trading, but it has much to offer in the margin and derivatives trading sections. You can open margin trading positions with 5x or 10x leverage, depending on whether you’re using cross-margin or isolated-margin trading.
As for derivatives trading, KuCoin offers 170 futures contracts with up to 100x leverage on a bunch of cryptos. Also, traders can open derivatives contracts with stablecoin and altcoin collateral.
Using leverage in crypto trading is a great way to make quick and considerable profits, capitalizing on small percentage of crypto movements. However, it’s also the quickest way to lose money if you aren’t careful.
That’s why we advise you to engage in leverage trading if you’ve already mastered the essentials of technical analysis and classic spot trading. Finally, stick to the pointers laid out in this guide to minimize your risk and engage in leverage trading responsibly without jeopardizing your portfolio.