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So, now you know a few trading techniques, you start to feel more comfortable and confident with your skills and you have had some successful trades. However, your baseline investment is not big enough to give you the returns you crave Then, you might consider trading with leverage.
Leverage gives you the ability to control much larger positions in a trade with only a relatively small deposit (your margin).
For example, let’s assume BTC is trading at $6300 and suddenly it pumps to $6700. You invested $1000 (~0.16 BTC assuming the price is $6300). Without any leverage you would be around 6.35% profit (meaning you would make around $63,5 with that trade).
Now, let’s assume that you’re using a leverage of 1:100 (or 100x). This means that every $1 you invest is worth $100, so with your $1000 deposit (margin) you can open a $100,000 position.
In this particular example, that would mean that you would be able to buy around 15.87 BTC with your initial $1000 deposit. So if you had open a long position at $6300 with 100x leverage using the initial $1000 and assuming the price pumps to $6700 as mentioned before, instead of making $63,5 profit (6.35%) you would have made $6350 (635%).
Some specific terms
Long – When you open a position with the expectation that the price will rise.
Short – When you open a position with the expectation that the price will fall.
Liquidation Price – Contrary to non-leverage trading, here you have a liquidation price which basically is a predetermined level at which your positions will be automatically liquidated (the higher the leverage you use the closer this level will be to your entry price aka higher risk)
Leverage – Leverage is an investment strategy of using borrowed money. Or, in other words, the ability to use something small to control something big. Specific to Crypto Trading, it means you can have a small amount of BTC in your account controlling a larger amount of it in the market.
Where can you leverage trade?
Examples for both long and short positions with 10x leverage.
Why leverage presents advantages in crypto?
As you can see on the picture above, contrary to “regular” trading (like Futures, forex, stocks, etc) you can have unlimited profits when you open a long position in BTC but your losses can’t be more than 100% (the amount you first deposited). In regular trading, instead of a liquidation price, there’s a margin price, in which the exchange will ask you to deposit more money in order to maintain your position opened which can lead to even higher losses. This is the advantage we have when trading crypto with leverage. We can have unlimited profits, but our losses are always limited to 100%.
The same thing happens when you open a short position in BTC (losses are limited to 100%), however, when shorting, your profits are not unlimited as they are when you have a long position opened. This happens because theoretically the price can’t drop more than 100% but they can rise more than 100%.
Leverage trading offers great opportunity for traders to take more profit than their personal capital would allow, but also comes with considerable risks that must be weighed before one moves in on a leveraged trade, so be safe.