The term “leveraged trading” can be confusing for beginners, who often find it hard to understand fully. However, before using leverage as a trader, you need to get some in-depth information about how it works and how to use it. 

In crypto, leveraged trading means using borrowed capital or funds to trade the market. Many crypto traders love to leverage to increase their trading stake and the percentage of profit they receive. While this formula is mostly used by traders with small capital to trade, a trader who has mastered leveraged trading can further multiply their stake with this strategy.

However, leveraged trading is not all bed and roses and in this article, both amateurs and pros will learn how leverage trading works, its benefits and drawbacks. 

So What is Leveraging?

Source- Tradesanta

Leverage trading is when crypto traders borrow more capital from the exchange to trade beyond what is available on their cash balance. It is worth noting that leveraging does not only apply to the crypto market; it can be used to trade other financial assets. 

Crypto traders use leverage trading because it increases their capital more than what they currently have in their wallets. Depending on the crypto exchange one uses to trade, some exchanges allow traders to borrow about 100 times what they currently have in their wallet. This means that a crypto trader interested in leverage trading can borrow about $100,000, assuming they have $1,000 in their wallet. 

Interestingly, in most cases, exchanges allow traders to borrow about ten times what they currently have in their wallets. Leveraging operates in various ways, depending on what the crypto trader desires. Furthermore, leveraging is calculated clearly so that crypto traders can easily visualise the amount they are set to receive from leverage. 

Most crypto exchanges describe the value of leverage using ratios. For instance, 1:5 (5x), 1:10 (10x), or 1:20 (20x) shows the value of leverage that a crypto exchange is willing to offer to traders. If you have  $100 in your wallet and need a 1:5 leverage, you get five times $100 ($500). 

How Does Crypto Leveraging Work?

Source- themoneymongers.com

A trader who wants to use leverage while trading needs to assimilate certain information about the topic before proceeding to trade. Before using crypto leveraging in a crypto exchange, you must deposit funds in a trading account. 

The amount in a trader’s trading account is known as collateral (initial capital), and the amount of collateral depends on the amount they need to open a position. 

Assuming you need a total of $10,000 to open a trading position with Ethereum, you need to have a collateral of $1,000 before you are given such leverage. Also, assuming you need a 1:20 leverage totalling up to $20,000, you must deposit $2,000 as your collateral. 

As mentioned above, leveraging while trading does not always end in profit; sometimes, you make losses. With this in mind, traders may need to maintain their collateral, assuming they encounter losses while trading.

Assuming a crypto trader opens a Bitcoin 10x  leverage trade with $1,000, they receive ten times the collateral ($10,000). During trading in the market, Bitcoin increases in value by 20%, and the trader receives $2,000 as a profit. This gives the trader more profit than if they had only traded with $1,000. This also applies to losses: if bitcoin is down by 20%, the trader must pay about $2,000 to keep using the leverage trading position. 

When Do You Use Crypto Leveraging?

Source: Cryptopolitan

There are many reasons why traders prefer leverage trading instead of using what they initially have to trade. 

The first instance of leverage trade is used when a trader wants to increase their profit while trading. Instead of trading with $100, a trader could use a 10x leverage trade to increase their capital to $1,000 to make more profits. However, a trader’s losses are magnified just as their profits are increased while using leverage in their trade. 

Another reason crypto traders use leverage trading is to increase the diversification of their investments. Assuming a trader has about one thousand dollars to invest in the crypto market, they can invest about $100 into leverage trade and use another part of the fund to make further investments. 

Pros of Crypto Leveraging

Below are some benefits that crypto traders might encounter while leveraging their trade. 

• One of the first benefits of leverage trading is that it allows crypto traders to increase their trading capital with a little collateral sporadically. 
• Leverage trading also helps crypto traders to make more profit using low capital. 
• Leverage trading allows crypto traders to diversify their portfolios by making other investments with leftover funds. 
• Leverage trading is easily understandable and can be used by almost anyone. 

Cons of Crypto Leveraging 

Below are some of the cons of using borrowed capital to trade cryptocurrencies. 

• A major drawback of leverage is that just like it magnifies profits, losses can be very heavy. 
• It may require some fundamental and expert knowledge to get started. 

Best Platform For Crypto Leverage Trading: BingX

Many cryptocurrency exchanges and trading platforms today offer leverage trading, and your success with leverage trading will depend greatly on the platform used.

This is why BingX is your best bet. BingX is the world’s leading social crypto exchange that offers unique trading experiences, including spot trading, futures trading, automated bot trading, copy trading, and zero-fee trading. 

BingX is easy to use, has no trading fees, and has amazing copy trading features that help you make smarter leveraged trading decisions with crypto.

Join our BingX Community to earn and stay in the loop about crypto, trading and the latest strategies!

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