Have you ever been absolutely sure about a price rally and wished you had more money to back it? In times like these, you can use leverage trading to make your wishes come true. It is a tool that can help you multiply your investment positions. It essentially gives you free money and allows you to amplify your profits.
That is the simple explanation of leverage trading. However, there are plenty of other things you need to understand about this tool before you decide to use it. While it can offer handsome returns, opting for leverage trading without complete prior knowledge can also result in heavy losses.
Keeping this in mind, we’ve rounded up all the essential information you should have before trying your hand at this risky yet rewarding investment strategy.
What is leverage in crypto?
In the crypto industry or otherwise, leverage works like a loan. Your exchange loans you extra position size against the collateral you provide. It allows you to invest Rs 1,000 in a particular asset, even if you only have Rs 100 as collateral in your wallet. This collateral is called a margin, and leverage is always a multiple of the margin funds. It could be 2X, 5X, 10X and so on.
Let’s say you opt for a 10X leverage position. In this case, if your margin is Rs 100, your leveraged position will be Rs 1,000. You then decide to invest in Ether with this leveraged position. If the price of Ether rallies 1 percent, you will receive a profit of Rs 100. This 1 percent profit on your leveraged position translates to a 10 percent profit on your margin.
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Therefore, if you have read all the chart patterns and everything points to a price rally, leverage trading is a great way to earn more with less. You can multiply your position many times over, thereby multiplying the potential profits too. But this is only if your prediction comes true.
What if things go wrong?
If things go wrong and the asset drops 10 percent, the platform will initiate a margin call. When this happens, your position is closed, and your margin amount will be liquidated. This is because a 10 percent drop on the leveraged position translates to a 100 percent loss on your margin amount.
This is the risk you take with leverage trading. Without thorough research and a proper risk management plan, you could lose the entire margin amount in minutes. So, how do you manage risks?
One way to go about it is setting a stop loss. It might seem unimportant, but it is great at eliminating liquidation risk — it puts a hard cap on the amount you can lose. This allows you to enjoy the benefits of leverage and manage risk.
Which platforms offer leverage trading?
There are plenty of exchanges that offer leverage trading. Some of the popular options include FTX, Binance, ByBit, Kraken, Phemex, etc. You can compare options based on several factors such as the trading fees, the maximum leverage on offer (it can range from 2X to 200X), how long you can hold a position, etc.