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Cryptocurrency Margin Trading Explained: How To Use Leverage

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Cryptocurrency

A margin trade, also called leveraged trading, involves borrowing funds from an exchange or broker to increase one’s position. Beginners and experienced traders alike use leveraged trades as a way to increase their wealth faster than they can by trading and investing traditionally.

A common instance of Trade Crypto With Leverage is using a 10x leverage. Essentially, it means doubling your original investment. With a $1,000 investment, we can open a position as if we had $10,000. Therefore, any profit that we make is tenfold increased once the position is closed.

There are, however, risks associated with leveraged positions. If a trade moves in the opposite direction, leveraged positions will liquidate the account, specifically the original order. Once the price of $32,000 is reached, a long position on Bitcoin with 10x leverage will be liquidated, while a short position will face liquidation at approximately $38,600.

The highly volatile nature of cryptocurrencies makes even the slightest use of leverage extremely risky. That is why this lesson aims to explain the intricacies of margin trading.

What is Crypto Margin Trading?

The framework is the same whether you are trading Bitcoin, Ethereum, or another supported cryptocurrency. The concept of margin trading refers to depositing collateral (a cryptocurrency or fiat currency), using that collateral to obtain a loan, and then trading with the loaned amount.

You can earn more money when you trade with a larger position size. Price movements produce larger profits when you trade with a larger position size.

Although margin trading can be a great way to win big, it can also be a very easy way to lose big.

How Crypto Margin Trading Works

Whenever you trade cryptocurrencies on margin, you are required to deposit a percentage of the position size as collateral. This amount is usually deposited in the traded asset itself (in-kind) but can also be deposited in fiat or stablecoins.

Your margin is the amount you deposit to form your leveraged position, which is the amount of financial power you are using to trade.

For any given leveraged position, the amount of margin required depends entirely on the leverage ratio (expressed as a ratio). You will need $1,000 deposited in your account as margin if you decide to open a 10:1 (or 10x) leveraged Bitcoin long with a $10,000 position size.

When using leveraged trading, the initial capital needed for a given position size is determined by the ratio used. Another way to express the ratio is 2x (2:1), 5x (5:1), 10x(10:1), etc.

If you believe the price direction is going up, you open a leveraged long position, while if you believe the price is heading down, you open a leveraged short position.

The pros and cons of margin trading cryptocurrencies

Consider these pros and cons if you’re still on the fence about margin trading with cryptocurrencies.

Pros:

Margin trading is less dangerous when you know how to manage risks with stop losses.

This is a great opportunity for traders who have good technical analysis skills.

Price volatility means greater profits when you get the market right.

Cons:

Margin trading is not like spot trading.

A greater exposure to price volatility means more losses when you are wrong about the market.

It is easy to liquidate beginners with little trading experience.

It is only recommended for people with plenty of time to watch over their open trades.

Crypto Leverage Trading is best left to experienced traders who have a deep understanding of technical analysis, have enough funds on hand to bounce back from losses, and have plenty of time to commit. 

For those who trade casually or who do not have the time to learn TA, paper trading is preferable or HODLing is a good strategy to use.

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