What is Crypto Leverage Trading (Margin Trading)?

What is Crypto Leverage Trading (Margin Trading)?

Robert McDougall 

January 8, 2024


Key Takeaways

  • Crypto leverage trading allows traders to borrow capital from brokers to purchase cryptocurrencies, increasing their buying power and potential for profit.
  • The popularity of crypto margin trading is growing as investors believe the intrinsic value of cryptocurrencies is higher than their current trading prices.
  • Risk management strategies such as stop loss, take profit, and limiting trades are important considerations for traders engaging in crypto leverage trading.
  • Bybit is a recommended platform for crypto leverage trading, but it is important to carefully evaluate and choose a reputable and legitimate site.

Crypto leverage trading utilizes margin debt to trade in cryptocurrencies. Margin debt is the amount of money a crypto trader borrows from the broker to purchase cryptocurrency. For this reason, crypto leverage trading is also known as crypto margin trading.

When you wish to maximize your potential profit from a high-conviction crypto trade, it makes sense to go for crypto leverage. Leverage will increase your buying power to trade higher crypto volumes. However, you should carefully consider your financial position and your risk tolerance because the potential for loss is also proportionately higher in crypto leverage trading.

Why is Leverage Trading Becoming So Popular?

A growing number of investors are using the power of crypto margin trading to boost their profits in this inflationary and high energy cost market. This trend is gaining popularity because a significant part of the global investment community now believes that the intrinsic value of cryptocurrencies is much higher than their prevailing trading prices.

Those who have a strong conviction don’t want to miss the opportunity to rapidly multiply their investments or make a short-term profit as a day trader and exit quickly. Therefore, they are increasingly inclined to use margin trading.

Moreover, some investors may go through a temporary phase of capital deficiency because they are already fully invested in cryptocurrency. If the market gives them further opportunity to enter crypto trades at lower prices, they may use borrowed capital (leverage) from their brokers to purchase additional amounts of crypto to boost their portfolio.

How Does Crypto Margin Trading Work?

As a first step, the crypto margin trader will have to place an initial deposit with their broker in order to borrow capital. For example, if you wish to make a crypto leveraged trade of $250,000 in the ratio of 1:10, you will have to open a position by putting in $25,000 (one-tenth of the investible amount) from your own funds.

The open position could be short or long. If you believe that the market price of a crypto asset, such as Bitcoin, will go down in the short term, you can open a short position. Long position is the reverse of it. When you short BTC, you borrow the crypto asset instead of cash. If the price indeed goes down and your short trade is successful, you purchase the same Bitcoin at lower rate and keep the profit (while you return the lender’s BTC).

When you long BTC (in the same example), and your long trade becomes successful, you will receive your cash deposit back along with the net profit you made. If you lose, your position will be liquidated and the lender or broker will keep your deposit.

The higher the leverage you use, the higher your potential for profit or loss will be. For instance, if the crypto trading platform allows you to use 1:100 leverage, you can make very high profit, but you are also exposing yourself to extreme risk of loss. Using very high leverage may not be prudent, unless you are a seasoned trader with a large financial capacity.

Pros and Cons of Leverage Trading for Cryptocurrencies

  • Opportunity to maximize profits with large positions even if your own capital is small
  • Suitable for traders who want quick entry and exit and have a good sense of market timing
  • Useful for diversification of portfolio because crypto leverage trading lets you open several small positions, enabling you to hedge the risks
  • Serious risk of large capital loss if the market conditions do not unravel as you had anticipated

Risk Management Strategies for Crypto Leverage Trading

Stop Loss:

This is a risk control tool that will close your crypto trade automatically at a specified price level if the price moves in an adverse direction. This will cut your losses and you will be knowing from the start the maximum amount you can potentially lose on a particular crypto trade.

Take Profit:

This tool is an inverse of Stop Loss. It lets you place a “Take Profit” crypto order where your position will be automatically closed the moment you earn a pre-determined level of profit. In volatile markets, both Stop Loss and Take Profit are prudent strategies to consider.

Limit Your Trades:

Before you go ahead with crypto margin trading, carefully evaluate your risk tolerance level, and never exceed it. Always calculate the worst case scenario and see whether you will be pay off the margin debt if your trade goes bad. Don’t invest more than you can potentially afford to lose.

Use Demo Trades:

If you are completely new to cryptocurrency margin trading, it is a good idea to first sharpen your skills with paper trading (demo trading). It costs you nothing and gives you the practice you need to understand how leveraged crypto trades work in the real world. eToro is our recommended platform for margin trading using a demo mode. Click here to read our full review of eToro.

Best Platforms for Crypto Leverage Trading

If you have decided that you want to try crypto leverage trading, the next step is deciding which crypto trading platform is the best. There are many scams out there now, so you need to be careful you are choosing a reputable and legitimate site. We have done the research for you, and we only recommend legitimate platforms. Bybit (read review) is the #1 best platform for leverage trading. If you want a full list of the top sites, you can read our full article on the top crypto leverage trading platforms. If you are an Australian reader, we recommend you take a look at this list of the best crypto leverage trading sites in Australia.

ByBit: #1 Crypto Leverage Trading Platform

The Bottom Line

Crypto leverage trading is a double edged sword. If you use it as a novice, you may end up hurting yourself. But when you acquire the skills to handle it, it can be one of the fastest and most powerful wealth building tools you can imagine. Spend time to learn the ins and outs of crypto margin trading, and start by investing small amounts. As your skills improve, you can start winning big as long as you maintain trading discipline and stay within your risk tolerance limits.

Marketplacefairness.org provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade or sell cryptocurrency or use any specific exchange. Please do not use this website as investment advice, financial advice or legal advice, and each individual's needs may vary from that of the author. This post includes affiliate links with our partners who may compensate us. 

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