Leverage Trading. Smash or Pass?
Leverage trading is immensely popular in cryptocurrency trading. In fact, leverage trading has reached popularity levels never seen before in any other market. What is leverage trading? Why is leverage trading so popular, and what are the risks that come with it?
What is leverage?
Trading with leverage is a system that involves using borrowed funds to increase one’s trading position beyond what would be available from their cash balance alone. You may do leverage trading by two times, three times your capital. Most crypto exchanges allow you to trade with up to 100 times more money than you have available in your account. Once the trade is closed the profit or loss made over the total position is being added or deducted from your cash balance, and the borrowed funds are returned to the exchange.
Why is leverage trading so popular?
Trading with leverage is not a unique concept of the cryptomarket. It has been used in traditional markets for decades. After the introduction of cryptocurrencies, trading has become more accessible than ever before. While in traditional markets a significant starting capital is often required, in cryptocurrency trading allows one to begin investing and trading starting from at least $1 dollar. It is attractive to smaller portfolios. The potential results are appealing to many people, which is the reason why many are willing to take excessive risk in order to grow their portfolio in a short amount of time. What many forget however, is that with big potential returns, the potential losses are equally as high.
Let’s follow through with an example:
Example:
– The position
If you have $1,000 in your account, then without leveraging your maximum position size is only $1,000. If one would trade on 2 times leverage, the maximum position size would be $2,000. And $1,000 is borrowed from the exchange for the duration of the trade.Once the trade is closed, the borrowed funds are returned to the exchange
– The results
If price has traded by 1% in your favor, the result with the 1x leverage would be either a $10,- profit. If the price moved 1% against our favor, the resulting loss is $10,-. The result of the 2x leveraged trade would be double. This means that the win is twice as large, but the loss as well.
The risk, a double edged sword:
With every opportunity there is risk involved. With trading on leverage there is no difference. The first and most obvious risk is the fact that leverage trading is a double-edged sword. While one can make larger profits, the losses will also be larger. In addition to that the higher your leverage level is, the closer your liquidation price lies, which would mean if hit, you lose your entire position and in some cases your entire account balance.
Verdict:
The pros:
- With leverage you can trade with more money then you have available in your account
- Reap larger rewards
- Grow your account quicker
The cons:
- Larger losses if price turns against you
- Lose money quicker
- The more leverage, the closer your liquidation price will be
Leverage trading can be very lucrative if one has the ability and skill to read the market correctly, and implements the correct risk management. When considering trading on leverage, always be aware of the potential risk involved. As a trader who has traded the crypto markets extensively over the last 3 years, I have seen many fellow traders go boom and bust. One day they trade alongside you, the next day the room has yet another empty spot. The faster you go up, the harder you can fall down. Therefore slow and steady growth has proven to be much more sustainable and long lasting. Only trade with money you can afford to lose, and only trade with position sizes you are mentally able to handle. This isn’t something that can be learnt in a day. Therefore give yourself time to learn, and adjust to different situations.
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Disclaimer:
The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.
All opinions expressed on Bitget’s Soapbox (also known as the ‘Soapbox’) are opinions of individual traders using the Bitget platform, and do not reflect the opinions of Bitget or its affiliate companies and partners. The Soapbox author’s opinions are based upon information they confirm to be reliable, but neither Bitget nor its affiliates warrant its complete accuracy, and it should not be relied upon as such.
