Bitcoin trading with leverage may not be a good idea for every trader. However, those who understand the tenets of margin trading can use it to maximize their profits in a way that wouldn’t be possible without the leverage trading idea. Leverage trading works both for the short-biased as well as the long-biased traders.
So what exactly is Bitcoin trading with leverage?
Trading with leverage is essentially trading with borrowed capital. The “leverage” is the margin or collateral that you put down when taking a trade and it is usually a fraction of the amount needed. When you do margin trading, you not only put yourself at a possible to increase your profits but also to increase your losses. Leverage trading is, therefore, a double-edged sword and you shouldn’t attempt it before you have backtested your strategy and put in place risk management mechanisms. Leverage trading entails borrowing funds for trading and this means there will be borrowing fees too. Taking overnight positions will attract more “interest” so you should factor in these costs when planning your trades.
Not all exchanges allow for leverage trading so you have to look for a suitable exchange first. Secondly, the exchange that offers leverage bitcoin trading will have a maximum leverage position so you should also consider that when selecting the exchange to use. You can use executium.com to execute your trades across several exchanges and the best part you can try it for free and only commit to a payment plan if you like the results.
Example of how leverage trading works
Assuming that the exchange you settle for offers a margin of 20%, it means that you have to put down 20% of the Bitcoin amount you wish to trade with. For instance, if your position is 20BTC, you will have to put down 4BTC as your margin. This can also be said to be a 5X leverage. Leverage is usually used to determining the movement of the underlying assets with respect to the price movements. For instance, in this example, an upward price movement by 1% would move your position by 5%. But the opposite is also true – if the prices drop by 1%, your position will also drop by 5%. This serves to show why leverage trading can be so lucrative but dangerous in equal measure.
Even though we gave 20% leverage in this example, some exchanges allow for a leverage of up to 100%. With such leverages, your account can grow exponentially or it could also totally wipe out your account. In order to protect traders, some exchanges and brokerage firms will require you to have a maintenance margin. A maintenance margin is a minimum amount that must be left untouched in your account once you have opened a trade. If your position drops below this position, you will get a margin call from the broker.
Leverage trading in cryptocurrency will enable skilled traders to grow their accounts with very little investments. This is one of the primary methods banks use to make money from their clients’ deposits. However, you should be very cautious when trading bitcoin with leverage because even though the profits are huge, so are the losses.