Some people tend to use cryptocurrencies as a means of payment. Indeed, digital assets are accepted as a payment method in some shops and restaurants.
However, they did not yet get widespread application in our everyday life. Investors often consider crypto a tool for increasing their capital due to the instability of this market and the volatility of crypto rates. Even though crypto trading has become incredibly popular, many people still do not know how to work with it correctly.
In recent years, leveraged cryptocurrency futures trading volume has consistently set new records. Such popularity of margin formed because of the desire of many traders to make quick profits with a small initial deposit. However, such tools have many pitfalls; nevertheless, with a correct approach, it is possible to turn them into an advantage.
How to Trade Borrowed Money and Get More Profit? What is Leverage in Crypto Trading?
Margin lending is another important element in cryptocurrency trading. In fact, this is a loan that the exchange provides on a short-term basis on the terms of collateral. A margin loan works as follows. Let's say you have $10,000 on deposit and want to buy cryptocurrency worth $50,000. In this case, the exchange takes your $10,000 as collateral and lends you $40,000. That is how margin lending works.
For the $40,000 loan you take, you will have to pay fees that will be charged from your cryptocurrency exchange trading account, regardless of whether you received a profit or loss from the trading operation. The cost of margin lending for all exchanges is different - this should be taken into account. The cost of margin lending can seriously affect the final financial result of a trader. Margin trading helps the trader to get more tangible profits than if one would get trading with his initial capital.
There is a downside to this trading type - the risk of bearing more significant losses. Margin lending can trigger a margin call. It is a request to put in additional funds to maintain a participant's position. It occurs when the quotes go in the opposite direction to what the trader was counting on. Losses reduce the amount of margin, and when it reaches a critical level, the trader receives a notification from an exchange about the urgent need to replenish the account. The position is liquidated forcibly if the existing margin is insufficient to save the situation.
In one click, $10 can turn into $100, $200, or even $1,000. The risk is that if, contrary to your forecast, the coin does not fall, but grows, then depending on which “leverage” you have chosen, the order will be liquidated. Suppose you took the maximum leverage ratio of 1:100 and opened a short position because you think that BTC is about to fall. If its rate grows by 1%, you lose all your funds. If the price drops (as you predicted), the potential income increases by 100 times.
Beginners should not take more than x3 leverage, for it is too risky. It will take some time to comprehend how it works. Experienced traders can trade with different leverage depending on the strategy.
When to Use Leverage Crypto Trading? How to Use the Bottom Line?
The market provides phenomenal opportunities for the fruitful use of margin lending. For instance, you have a $100 deposit. The daily drawdown is $5, which is 5% in our case. A daily drawdown is a predetermined amount that an investor is willing to lose during one trading session.
Exceeding the daily drawdown excludes further participation in trading during the current session. Using this mechanism allows to limit losses of trading account by the amount of the daily drawdown.
The trader divides the deposit into two parts. $95 remains on the main deposit, and $5 is transferred to the trading margin account. Margin lending is connected to the trading account, say x20. Thus, the trader receives purchasing power in the amount of $100 (5×20), that is, in the amount of his main deposit. At the same time, the exchange accepts $5 as collateral for the loan. In this case, as a result of his mistakes, the trader risks losing not the entire amount of the deposit, but only those $5 that he set as a daily drawdown and transferred to the exchange as collateral.
Using this methodology allows you to limit losses without limiting potential profits. It is quite obvious that the determination of the size of the daily drawdown, as well as the determination of the trading volume, is made exclusively by the trader. The more experienced a trader is, the more margin lending he can attract for his trading.
At the same time, at the moment, there are no effective mechanisms in the cryptocurrency markets to limit the trading activity of traders who go tilt. Often colleagues on the trading team stop the tilted trader in time. Tilt is an unstable emotional state of a trader, caused by strong emotions from profits or losses, when he begins to buy and sell cryptocurrency in an unusual style, with instruments and/or volumes that are not typical for him, begins to lose control over trading, make many mistakes, which in ultimately leads to huge losses.
How to Open Positions with Leverage?
Positions in margin trading fall into two categories:
- Long. You buy cryptocurrencies with borrowed funds in order to sell them at a higher rate.
- Short. You borrow money to buy crypto and immediately sell it in order to buy it cheaper later.
In both cases, the trader makes a profit from the price difference at the time of opening and closing a trading position. In the first case, the difference should be positive (price rise), in the second case, it should be negative (rate drops).
How Does Leverage Trading in Crypto Work? Main Strategies to Use
Here are the main methods used with margin:
- Cross margin - a trader uses the whole his deposit, and in case of liquidation, it is canceled
- Isolated leverage - a trader can choose the amount to lose, and this will allow to take x80 or even x100 leverage. But the higher the leverage ratio, the less chance to profit: it is important not to miss the moment to exit. Experienced traders rarely use leverage bigger than x25-x30.
The Place to Trade With Leverage. Best crypto trading platform
It is the largest crypto exchange in Europe, offering a full set of tools for crypto traders, including margin trading. To access trading with leverage on WhiteBIT, you must pass KYC verification. There are currently two ways to do this:
- Registration through Diya (for citizens and residents of Ukraine)
- Standard verification (available to everyone, involves a photo with a passport and other documents).
WhiteBIT has an interesting feature for margin trading – 1x leverage. When choosing it, the trader does not receive a loan and trades with his own funds. However, despite this, one receives funding - a dynamic commission that varies depending on the market situation and the status opened.
ByBit is one of the most famous platforms providing margin loans for trading. ByBit offers leverage rates up to 100x. The exchange allows for margin trading BTC, XRP, ETH, EOS, and USDT.
It is world’s largest crypto platform by trade volume, relatively recently opened a service for margin transactions. First, it requires users to pass the verification process and then take a margin with a minimum of five times leverage. You can get a leverage repayment discount if you settle with Binance BNB native coin.
Poloniex, founded in 2014, is among the oldest platforms for crypto. In addition to regular trading, Poloniex also provides margin resources for advanced users. Like in previous cases, to begin trading, users pass the KYC procedure, which is usually processed within a few hours. Ten pairs of crypto assets with BTC are supported for margin trading.
BitMEX has also managed to gain notice among traders despite relatively little experience in providing tools for margin trading. BitMEX offers trading for 13 pairs, including Bitcoin, Cardano, Ethereum, Bitcoin Cash, Litecoin, Ripple.
On another well-known cryptocurrency exchange Huobi, leveraged trading is possible with nine cryptocurrency assets: Bitcoin, Tether, Ethereum, Huobi Token, Ripple, Chainlink, Bitcoin Cash, Litecoin, EOS. To get started with Huobi Margin, you also need to complete the KYC verification process, which can take a few days.
Margin trading requires preparation and knowledge of the fundamental rules of risk management. In skillful hands, this financial instrument can bring huge profits even with relatively little capital. The disadvantages of this tool are not a stumbling block - following the principles described in this article, beginners will be able to limit their losses as much as possible in the learning process.
If you want to try margin trading, you should understand the risk you take in the case the market moves in a direction different from your plans, and use tools to reduce these risks, for instance, a stop-limit order. Each exchange has its own list of cryptocurrency to buy, but novice traders better use less volatile assets such as BTC or ETH. That means choosing assets with the highest market capitalization.
With the correct application leverage tool, you will be able to diversify investments and get the desired profit. To learn more about trading with leverage and other advanced financial instruments, welcome to the WhiteBIT blog. It offers manuals on taking your first steps in trading and handling even the most advanced tools. One good feature of this exchange is the demo trading option. It makes it possible for users to try different leverage ratios and see how it works in margin trading without the risk of losing real money.
In addition, on the blog, you will find many interesting articles, the latest news, and industry updates, which will expand your knowledge about up-and-coming crypto projects.