What is leverage Crypto trading?

Leverage trading in Crypto allows you to control a larger investment position in the market by borrowing funds from a broker, essentially magnifying your buying power. This can amplify your potential profits, but also magnifies potential losses

• What is leverage?
• How does leverage work?
• Leverage ratios and their implications

What leverage ratio is best in Cryptocurrency trading?

There's no one-size-fits-all answer for the best leverage ratio in Cryptocurrency. It depends on your individual risk tolerance and experience level. Beginners should generally opt for lower leverage ratios to minimise potential losses.

Experienced traders with a higher tolerance for risk might consider using higher leverage to potentially amplify their gains.

Types of trades in Crypto leverage trading

In the world of Crypto leverage trading and margin trading, you can use two main approaches to capitalise on price movements, long trades and short trades.

1. Long trades

Entering a long position with leverage essentially means a trader anticipates a Cryptocurrency’s price to increase. Buy low, sell high. Here’s how it works:

You believe the price of a particular Crypto (e.g., Bitcoin) will go up in the future.
You enter a long position by using leverage from a Crypto exchange to magnify your potential gains.
By using leverage, you gain access to more funds than your initial investment.
If your prediction is correct and the price rises, you profit from the difference between your buying price and the selling price.
Leverage amplifies your profits. Imagine you buy $1,000 worth of Bitcoin without leverage. If the price increases by 10%, you’d make a profit of $100.
However, with 5x leverage and a $1,000 investment, you could control a $5,000 position. In this scenario, a 10% price increase would yield a $500 profit.

2. Short trades

Short positions with allows you to profit from a Cryptocurrency’s price decline. Sell high, buy low. Here’s a breakdown of the concept:

You believe the price of a particular Crypto will decrease.
You borrow the Crypto asset from the exchange using margin.
You immediately sell the borrowed Crypto at the current market price.
Later, you close out the trade position by repurchasing the same amount of Crypto. Hopefully at a lower price.
If your leveraged trades are correct and the asset price falls, you pocket the difference between the selling price and the repurchase price.
Leverage amplifies your profits in short selling. Similar to long trades, leverage magnifies your gains. Let’s say you use $1,000 of margin to borrow and sell $5,000 worth of Bitcoin futures using 5x leverage. If the price falls by 10%, you can repurchase it back for $4500 and return it to the exchange.
Your profit would be $500 (excluding fees) on your initial $1,000 margin investment