Using Leverage in Trading

• What is the definition of leveraged trading？

• A leveraged trade example

• Tokens with a high leverage

• Leveraged trading's dangers

Trading cryptocurrencies entails a degree of risk. That message cannot be sugar-coated in any way. Many traders are drawn to it because of its high risk. Prices fluctuate dramatically over extremely short periods of time, and traders perceive this as an opportunity.

What is leveraged trading, and how does it work？

Borrowing money to increase a trader's potential gains or losses by up to x100.

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Consider the date of February 8, 2021. Tesla CEO Elon Musk tweeted that the company had invested $1.5 billion in Bitcoin, which soared in value by about $8,000 in one day.

This marks a 20 percent increase from a low of $38k.

The event sparked rises in alt-coins that made the 20% gain seem insignificant. Wild swings with the prospect of enormous trading gains are alluring, but while cryptocurrency is unpredictable, the Tesla-inspired increase isn't typical.

However, there is a strategy to trade that multiplies volatility, multiplying both possible gains and losses, so that every day is as spectacular as February 8th. It's known as leverage.

Before we go into detail about what leverage is and how it works, it's important to remember that trading with leverage is similar to driving a high-performance sports vehicle. It might be thrilling, yet a single blunder can cause disaster.

To continue the analogy, if you're learning to drive (trade), you shouldn't use leverage and should instead stick to a Prius.

What is leveraged cryptocurrency trading？

Leverage works by allowing you the ability to trade positions that are multiples of your trading capital through a cryptocurrency exchange or brokerage.

You might have $1,000 in trading capital, for example.

If you made a 10% profit on a standard (non-leveraged) trade, you would make $100 (1,000*0.10) and end up with $1,100.

If the deal resulted in a 10% loss, you'd lose $100 and end up with $900, or a 90 percent profit.

You could make the identical deal with x10 leverage, but your $1,000 would operate as a Margin, and you'd effectively lose money.

The 10% gain would now result in a $1,000 profit (10,000*0.10).

However, a 10% loss would mean that you would lose your whole trading capital - a 100% loss.

That example is shown in a table below.

Long Position - 10% Fall	Without Leverage	With Leverage x10
Trading Capital	€10,000	€10,000
Trade Size	€1,000	€10,000
Loss from Trade	€100	€1,000
% Capital Lost	1%	10%
% Capital Remaining	99% - €9,900	90% - €9,000
% Remaining Balance to Break Even	1%	11.11%

Because leverage increases profit and loss, a leveraged trade will reach a point when your position will be automatically liquidated unless you add more cash. A Margin Call is another term for this.

Because the variations are fractions of a percentage, leveraged trading is common in markets with low volatility, such as foreign exchange markets. Despite the fact that bitcoin is inherently unpredictable, some exchanges offer leverage up to 100x, with multiples starting at x2 or x3 and increasing from there.

Tokens with a High Leverage

Trading with leverage is surprisingly straightforward for something so dangerous, and some exchanges have gone even farther by generating leveraged coins.

A leveraged token is simply another way to increase risk without having to offer collateral or worry about margin levels. The price movement is simply amplified at a predetermined level or range, and then incorporated into a new synthetic token version of an existing coin.

For example, Binance Leveraged Tokens offers BTC UP and BTC DOWN leveraged tokens. When you purchase BTC UP (x4), you are effectively amplifying the percentage gain in Bitcoin's price by 4:1; this is exactly how the BTC UP token works.

However, the leverage isn't constant; instead, it aims for a leverage range of x1.25 to x4; if Bitcoin's price rises, the leverage rises, then falls when the opposite is true to try to minimize liquidation. If you wish to buy BTC DOWN, the opposite is true.

Because the tokens are only designed to be used as a trading derivative, neither can be withdrawn from Binance.

Leverage tokens are typically employed in short-term spot trading techniques, although they can be kept for longer as part of a more complex trading strategy that involves hedging other assets, such as futures or options.

Leverage Risk Mitigation

Trading bitcoin with leverage, as previously said, increases risk and should only be considered by experienced traders. It would be incredibly dangerous to simply apply leverage and let loose. To reduce the danger, adopt the fundamental strategies listed below.

Sizing of the Position

The most important thing to remember while using leverage (which also applies to trading in general) is to avoid putting yourself in a situation where you could lose a significant amount of your trading capital.

You may be less motivated to retain discipline in how you manage the remaining 20% of your trading money if you lose a substantial chunk of your trading funds - say, 80% - in one single leveraged deal.

Putting a stop-loss order

As mentioned earlier in this section, entering a leveraged transaction should be approached in the same way as entering a conventional trade. You should have an entry and exit point based on expected profit, as well as a point where you pull the plug and admit you were incorrect.

Setting a Stop-Loss in leveraged trading is referred to as a Stop-Loss, and it is critical to avoid

unlimited losses due to the increased risk. Keep in mind that the ability to activate a Stop-Loss exactly when needed may be contingent on the market having enough liquidity.

The advantages of knowing without having to attempt

Learn Crypto is devoted to explaining the fundamental concepts of cryptocurrencies to those who are unfamiliar with the subject. Given the level of risk involved, leverage trading should only be attempted by the most experienced traders.

You may believe that reading this post is a waste of time; nevertheless, this is not the case.

You may not be a skilled enough skier to attempt a black run, but you should be aware of the difficulty and danger. It aids in the creation of a mental map of the range of risks associated with skiing and where you sit.

The same may be said for cryptocurrencies. The more you know, the easier it will be to interpret news, mood, and adoption.

The potential economic impact of the Covid19 pandemic spread instantly from the major stock markets on March 12th, 2020, which is known as Black Thursday. Bitcoin fell 50% in 24 hours.

This type of spectacular incident caused a wave of traders liquidating leveraged crypto positions and issuing Margin Calls in other markets, with traders closing crypto positions to fund. This resulted in a cascade of events. Bitcoin has dropped from a high of $7,648 to a low of $3,870 in the last 24 hours.

“Traditional safe havens are underperforming right now, partly because institutions are selling positions in these assets to satisfy equity market margin calls.”

Whereas earlier reporting on such events from sites like Coindesk may have made little sense to you, understanding about themes like leverage allows you to absorb and understand what is going on from a completely different perspective.