What Is Leverage in Crypto Trading? | Binance Academy
In cryptocurrency trading, leverage refers to the use of borrowed capital to make transactions. Leverage trading can amplify your buying or selling power, allowing you to trade larger amounts. Therefore, even if your initial capital is small, you can use it as collateral to make leveraged trades. While leveraged trading can multiply your potential profits, it is also subject to high risk, especially in the volatile crypto market. Be careful when using leverage to trade cryptocurrencies. You can incur substantial losses if the market moves against your position.
Reading: Bitcoin leverage trading
Leverage trading can be confusing, especially for beginners. But before you experiment with leverage, it’s crucial to understand what it is and how it works. this article will focus on leverage trading in crypto markets, but a lot of the information is also valid for traditional markets.
what is leverage in cryptocurrency trading?
Leverage refers to the use of borrowed capital to trade cryptocurrencies or other financial assets. It amplifies your buying or selling power so you can trade with more capital than you currently have in your wallet. Depending on the cryptocurrency exchange you trade on, you could borrow up to 100x your account balance.
The amount of leverage is described as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x). shows how many times your starting capital is multiplied. For example, imagine you have $100 in your trading account but want to open a position worth $1,000 worth of Bitcoin (BTC). With 10x leverage, your $100 will have the same purchasing power as $1000.
how does leveraged trading work?
Before you can borrow funds and start trading with leverage, you need to fund your trading account. the initial capital you provide is what we call collateral. the margin required depends on the leverage you use and the total value of the position you want to open (known as margin).
See also: General 30 what happened with coca cola 2021 best
let’s say you want to invest $1000 in ethereum (eth) with 10x leverage. the required margin would be 1/10 of $1,000, which means you need to have $100 in your account as collateral for the borrowed funds. if you use 20x leverage, your required margin would be even lower (1/20 of $1,000 = $50). but keep in mind that the higher the leverage, the higher the risks of being liquidated.
In addition to the initial margin deposit, you will also need to maintain a margin threshold for your trades. When the market moves against your position and the margin is less than the maintenance threshold, you will need to deposit more funds into your account to avoid being liquidated. the threshold is also known as the maintenance margin.
example of a leveraged long position
Imagine you want to open a long $10,000 btc position with 10x leverage. this means that you will use $1,000 as collateral. If the price of BTC goes up by 20%, you will make a net profit of $2,000 (less fees), which is much higher than the $200 you would have made if you traded your $1,000 equity without using leverage.
However, if the price of btc falls by 20%, your position would go down by $2,000. Since your starting capital (collateral) is only $1,000, a 20% drop would trigger a liquidation (your balance drops to zero). in fact, it could be liquidated even if the market only drops 10%. the exact liquidation value will depend on the exchange you are using.
To avoid being liquidated, you must add more funds to your wallet to increase your collateral. in most cases, the exchange will send you a margin call before the liquidation occurs (for example, an email telling you to add more funds).
example of a leveraged short position
now, imagine you want to open a $10,000 short position in btc with 10x leverage. In this case, you will borrow BTC from someone else and sell it at the current market price. your collateral is $1,000 but since you are trading with 10x leverage you can sell $10,000 worth of btc.
See also: Bitcoin Rush Review 2022 – Scam or Legit?
However, if btc rises 20% to $48,000, you would need an additional $2,000 to buy back the 0.25 btc. your position will be liquidated as your account balance is only $1,000. again, to avoid being liquidated, you must add more funds to your wallet to increase your collateral before the liquidation price is reached.
why use leverage to trade cryptocurrencies?
As mentioned, traders use leverage to increase their position size and potential profit. but as the examples above illustrate, leveraged trading could also lead to much larger losses.
how to manage risk with leveraged trading?
how to use margin trading on binance?
3. you will also need to transfer funds to your margin wallet. click [transfer collateral] below the candlestick chart.
4. select the wallet to transfer funds, the destination margin account and the currency to transfer. enter the amount and click [confirm]. In this example, we are transferring 100 usdt to the cross margin account.
7. you can buy bnb with leverage by entering the amount of usdt for [total], or the amount of bnb to buy for [amount]. you can also drag the bar below to select the percentage of available balance to use. then you will see the amount you are borrowing for this operation. click [margin buy bnb] to open the position.
Leverage allows you to easily get started with a lower initial investment and the potential to generate higher profits. Still, leverage combined with market volatility could cause liquidations to happen quickly, especially if you’re taking 100x leverage to trade. always trade with caution and assess risks before engaging in leveraged trades. You should never trade with funds you cannot afford to lose, especially when using leverage.
See also: Bitcoin Loophole 2022 | Is it Legit or a Scam? | Bankless Times