Cryptocurrency Leverage trading (aka crypto margin trading) is growing to become one of the most popular and profitable techniques among many Bitcoin and crypto enthusiasts.
This trend reflects the growth recently observed as many exchanges are now implementing the option of trading bitcoin with leverage into their platform.
Likewise, existing and newer exchanges are continually improving their leverage allowance to accommodate the increasing demand for crypto margin trading.
What then is crypto leveraging?
What is Cryptocurrency Leverage Trading?
The system of leverage or margin trading involves using borrowed money against your current funds to trade cryptocurrency or to “lever up” on an exchange.
In a more straightforward form, leverage trading is the ability to increase your buying power when trading with your existing cryptocurrency or fiat by merely borrowing more funds. Generally, borrowed funds attract some interest rates, but not in all scenarios.
To break it down, let’s say you have an existing $100 fund (or its equivalent in crypto asset) in hand. If you leverage on 10x of your current fund, that’ll increase your buying power to $1,000, which is a 1:10 leverage trading. Here you have just a 1% margin. The word ‘leverage’ means the proportion of the amount of your assets in an order.
Whatever the profit made, it will be multiplied by 10 – which is an extremely high-profit margin. That means you only risked your existing $100 against such a rewarding trading profit.
On the other hand, if you had an unsuccessful trading experience, only the existing fund would be lost.
Other essential parts of crypto leveraging you need to be familiar with include Initial Margin and Maintenance Margin.
The Initial Margin
By now, you already understand what leverage trading means. Next, you also need to know what the initial margin is and how it works. Remember, leverage traders can use borrowed money against a small margin to place orders on the exchange platform.
Using the Bybit exchange as a case study: Assuming that you use a 100x leverage in a contract worth $100, your initial margin will be $1. Bybit has risk limit levels for leverage trading to help you lower the risk of being liquidated.
The Maintenance Margin
In simple terms, the maintenance margin is the minimum account value for you to hold or maintain your position. It is crucial in that it decides the liquidation price of your position and as such when your position will be liquidated.
Bybit, for instance, applies its maintenance margin to the “Bankruptcy Price” instead of the “Entry Price” as is used in other exchanges. This ensures that there are no partial liquidations, and the potential profits remain the same unless it becomes liquidated.
How to Get Started with Cryptocurrency Leverage Trading
Now that we have covered what leveraging and the initial margin is all about, let’s now delve into how you can get it all started.
First thing first, you’ll have to choose and register on one of the top cryptocurrency exchange platforms. Here, we will use Bybit as a case study to explain important information that would serve as guides to your understanding of how to trade crypto with leverage.
Basically, operating crypto leverage trading on most of these platforms has a somewhat similar approach. Only a few features here and there make the difference. That means if you can trade on Bybit, for instance, you should be able to trade on any other platform without having to learn additional trading skills.
Now, using Bybit as a point of reference, you will need to deposit the funds you wish to trade with into a registered account registered on the Bybit platform. You may then select how much leverage you want to utilize upon placing an order.
The platform will typically allocate an exposure limit in order to protect you and itself from going into debt by ensuring the margin (required deposit) can cover the loss if the trade goes wrong.
An additional step-by-step guide on how to successfully trade on the Bybit exchange is provided in the context of this article. Read along to discover some more helpful information before swinging into action.
Leveraging with Short or Long Opening Positions
Generally, there are two options available for cryptocurrency leverage trading. These two options (long position leveraging and short position leveraging), allows you to make profits from both rising and falling markets.
When you open a position, a portion of your account balance is held as collateral for the funds you borrow from the exchange. If your trade is successful and you close the position at a profit, your collateral is returned to you along with those profits minus any fees.
Knowing how to properly manage your trading positions can result in profits without you falling prey to the volatile market. However, if you’re in loss due to market downturn, your trade will automatically be closed, and your collateral liquidated when the market reaches a certain price – this is known as the liquidation price.
- Long Position Leveraging
When you open a long position trading option, you can buy a contract because you believe it will increase in value. The trade takes longer time but has a bigger potential in profit.
- Short Position Leveraging
Unlike long position options, short position leveraging is when you sell a contract because you think its price will go down, and then you can buy it back at a reduced price.
Technically, for short positions to work, you will need to sell the asset first and then later buy it. Traditionally, Bybit or any other exchange platform you trade on will automatically do that for you.
How to leverage cryptocurrency and Make a Profit When the Market Falls
One of the many benefits of crypto leverage trading is that it allows you to potentially turn a bear market into a profitable opportunity. This is what we mean; let’s say you have up to 1 BTC on December 17, 2017, at a peak value of above $19,764. If you predict a fall in market price and then sell your BTC at a high price, you expect to buy it back at a reduced rate if the market finally falls.
If you later decide to buy back into BTC say, around December 15, 2018, at a price worth $3,112, you could have made a profit of $16,652.
When you add leverage trading into the mix, your potential profit could have been much higher. If, for instance, you traded on the leverage of 5:1, your profit would be 5x greater. It’s on this juicy and potentially high profits that make leverage trading an attractive prospect to experienced traders.
Warning! Cryptocurrency Leverage Risks
Point blank; trading crypto with leverage is not for the faint-hearted or the inexperienced ones! The highly volatile nature of the crypto market makes leverage trading such a very risky technique.
One of the first rules you should know is this: “Never trade with funds you can’t afford to lose.” This sad but true statement should be your watchword anytime you’re about to enter a trade.
However, with enough experience, you can drastically reduce your risk level. Therefore, it would be best if you learn from scratch what leverage trading entails. One significant risk factor associated with leveraging cryptocurrency is the liquidation price.
The Liquidation Price – What is it?
Simply put, liquidation is when your margin level gets to the maintenance level. The maintenance level is the minimum amount an exchanger will require for you to hold a position for a particular trade.
That is to say that your trade position will be closed once you hit the maintenance margin. The liquidation price is calculated based on your leverage, maintenance margin, and initial funds.
The higher the leverage, the closer the liquidation price is to your entry price, which makes it even riskier. The liquidation price will always be met before the price reaches the liquidation price.
If the trade price touches the liquidation price, the position on Bybit becomes liquidated. This basically means that the initial margin is lost. So, in other words, if the position gets liquidated, you risk losing the position and the money you used to open the position. This is the riskiest part of leverage trading.
TIPS ON HOW TO AVOID TRADE LIQUIDATION: To prevent your leverage trade position from hitting liquidation, you should always set up a stop loss.
The Main Benefit of Crypto Leveraging
One of the biggest benefits of margin trading is that you can use the market direction to your own advantage. You can make additional profits provided the market moves in the direction you expect.
The overall profit of the positions once the bitcoins are sold and the loan is repaid is significantly higher compared to an ordinary trade execution without leverage.
The Major Drawback in Leverage Trading
Crypto leveraging is undoubtedly a two-edged sword. The major disadvantage of this high-profit technique is the amount of risk involved. The higher the amount of leverage you take, the higher the amount of money you risk to lose should the market move against your direction.
Therefore, it is highly advisable to leverage trade after you have garnered enough experience already on the market. Many trading platforms only offer a limited amount of leverage trading opportunities to lessen the associated risk.
Top Risk Management Tips to Consider When Trading Cryptocurrency with Leverage
If you have decided that you want to progress to trading on margin, then you need to make sure that you know what you are using risk management best practices when placing your trades. So, remember these simple tips to minimize your risk:
Many platforms like Bybit provides potential traders with a demo test net to check out and practice on the platform safely before trading with real funds.
Practice well before you start off
With it, you can get familiar with things like placing an order, executing and canceling orders, while still interacting with the real simulated marketplace. Make sure you use this feature to get well acquainted with the platform before you finally place an order with real money.
For emphasis, remember to put down only what you can afford to lose. So, deposit only a small amount into your account. This way, you can minimize your loss even if the market goes against your stipulated direction.
Set reasonable leverage:
It is true that the higher the leverage you choose, the higher your profit. But this can only be achieved if everything goes well.
Since the volatility of the crypto market makes it so unpredictable, you should avoid getting seduced by the maximum potential leverage available. You will minimize your risk will lesser leverage points.
Pick a market at a time
One step at a time. Rather than spreading your trades across several contract markets, choose one contract and focus on it. For example, you can select only ETHUSD and focus on it. This will help you develop a deeper understanding of market trends and price movements.
Be familiar with your order
Ensure you study and get familiar with your first few trades and the order screen. Pay more attention to the “Cost” field, as this shows the maximum amount you could lose from your trade.
Only for experienced traders
If you’re totally new to the world of cryptocurrencies or online trading, admit that leverage trading is not for you.
Where to Trade Cryptocurrency with Leverage
Now that we have touched the rudiments of crypto leveraging let’s put you through the best platforms to choose from. We will also show you why we believe they are the finest options out there. This is crucial especially if you’re planning to dip your feet into the waters of crypto leverage trading.
Today, there are more than enough exchange platforms to choose from. We recommend that you choose only reputable platforms like Bybit, BitMEX, or eToro to trade. You can, however, do your research to look out for more options and get familiar with their features and how they work.
We use Bybit as the best crypto leveraging platform due to its many advantages over other exchanges. For example, Bybit has the fastest matching engine, delivering 100,000 TPS per pair when compared to its counterparts.
Once you have registered on Bybit, the next procedures are straightforward. Here are a few essential things you should know about the Bybit exchange.
Step 1: Register an account on Bybit
Start your registration by using either your email registration or mobile registration option.
To register via email:
Simply fill in the boxes with your email address, password, and optional referral code. Next, check your email for verification.
To register via mobile:
If on the other hand, you choose the mobile registration option, simply enter your country, mobile digits, password, and optional referral code. Verify your mobile to set up an account.
After registering, you can set up additional security measures.
Step 2: Deposit funds into your account
Click on the ‘assets’ to direct you to the asset page. There, you can deposit using any of the available assets by scanning the QR code.
Step 3: Navigate to the trading screen
To start trading, click on the ‘trade’ button. Open a ‘Buy/Long’ or ‘Sell/Short’ position order to trade.
Step 4: Enter the details of your position
In the order box, select the type of order you want to place. For this example, we’ll be using a Market Order. Enter the quantity of your trade that is the amount you want to buy or sell in US dollars (USD).
Step 5: Set your leverage
Use the Size slider to set the desired level of leverage for your position.
Step 6: Review the details of your transaction
Take a moment to review the full details of your transaction before you finally execute it.
Step 7: Open your position
Once you have decided on the direction of the market, and you think the market price will rise, then click on “Buy” to go long. If you believe the market will fall, click on “Sell” to go short. Next, review the order confirmation page to confirm your order.
Step 8: Withdraw your funds
To withdraw your profit on Bybit, go to the “Assets” tab at the top of the page and view the cryptocurrencies in your account.
You will be asked to complete a 2FA verification before you can withdraw your funds from your Bybit account.
With adequate knowledge of cryptocurrency or online trading, you can virtually use this same step-by-step guide to trade on other top exchanges such as BitMEX and eToro.
Crypto leverage trading can be an exciting tool to help you make a lot of money, but not without its risks. In other words, leveraging is like a two-edged sword that could yield you an extremely high-profit margin. At the same time, leveraging can make you go bankrupt if care is not taken. Hence, make sure you understand what you’re in for before setting up a trade.
Hence, make sure you’re fully aware of all the risks involved before deciding whether this is the right approach for you.
Finally, in whatever you do, always remember these two things: (1) Do not trade on funds you can’t afford to lose. (2) Always set your stop-loss correctly. (3) Bonus, ensure you choose a reputable exchanger such as Bybit to place your trade. Other better alternatives you can use include BitMEX and eToro.