More often than not, we are faced with situations where we know that a deal would be profitable, but we do not actually possess the capital to open such positions. With respect to the crypto world, this does not only end up with restricting the portfolio of possible investors but also attenuates the magnitude of liquidity.
Crypto trading platforms with leverage helps you capitalize on such inaccessible long and short positions when it comes to cryptocurrency trading. You can even trade on positions that are 2X, 10X and even 100X the capital you have in your command. However, it is not as simple as it sounds, and there are a lot of meticulous measures that need to go into consideration before you embark on leverage trading.
We will look at all the details of leverage trading and the nuances of being successful in it. To understand the concept of leverage, we will need to understand the concept of margin trading.
What is bitcoin margin trading?
Margin trading, simply put, it’s a facility provided by an exchange to enable traders to open trading positions that are beyond their capital reach by borrowing funds from the exchange. With this leverage, traders can expect to increase their profit in proportion to the multiplier provided. For example, if the leverage is 2X, the profit would be 20%, even if the capital had the potential only to increase the profit by 10%.
On the surface, it might seem like a risk for the exchange. However, since the exchange considers the liquidation price, it might not be a high risk faced by the exchange. It is observed that most of the popular exchanges like Binance, BitMEX, and ByBit provide a margin of 100X or more. It is also to be noted that just because an exchange gives a high multiplier in terms of margin, it does not mean that the exchange is trustworthy. These crypto trading platforms with leverage ensure that their most loyal traders stay hooked to that platform.
To understand the awesomeness of margin trading, they are also required to understand its counterpart, the concept of spot trading. In spot trading, you are essentially required to hold the capital or the balance needed for executing the trade. It is one of the simplest forms of trade, and except for the capital, it does not require anything more. It is one of the biggest reasons why trading novices resort to spot trading, and after they are giving the essential expertise and hang of the market, they get into margin trading.
Understanding the difference between long trading and short trading
The English language might define these two terms as nothing connected to the realm of trading. However, these two terms find their relevance to the world of trading in an interesting way. Long trading refers to the classic method of trading where people buy assets and wait for the value to increase, so they can sell them at a profit. It is the most regular way of trading, and it can be completed without leverage.
Short trading or shorting in short (pun intended) is a convoluted process. It might not be a training technique for the novice traders, but experienced investors can surely make use of this complicated-yet–profitable method. Short trading is technically a trading process where the trader sells an asset and buys it back at a lower price. It might be difficult to comprehend this process when we have always been used to buying an asset at a lower price and selling it at an increased rate.
In essence, what happens is that a trader buys crypto assets from a broker-dealer, it is ensured that the asset is expected to suffer a price drop at a fixed date. They then go on to sell these assets or positions to the buyers at the market rate.
Short-selling is highly risky, but it has a high risk to reward ratio. As much as there are possibilities that the profits can be really high, there are equal possibilities of losses as well.
Let’s illustrate this with an example. Let’s say a trader buys $10 worth crypto assets from a broker-dealer. The price of this is expected to drop to $8 in the next few days. The traders can sell the asset to buyers at $10 and buy them back for $8, resulting in a profit of $2 per trade.
From the above examples, it is quite evident that shorting cannot be performed without leverage.
On the surface, leverage might look like one of the greatest advantages offered in the world of cryptocurrency trading. However, it takes quite a lot of expertise and experience to handle leverage with care. It has to be understood that the possibilities of the cryptocurrency cost moving against the predictions are still prominent. It would amplify the potential loss, and it might even end up consuming even the actual money that you had! It is important to choose your leverage multiplier subject to your comfort and the understanding of the crypto market, the possible fluctuations and uncertainties.
How to handle it with care?
All these possibilities of disadvantages should not deter an adventurous and ambitious trader from experimenting with margin trading. With care and knowledge, the trader can make the best use of leverage and ensure that it brings advantages without any deterioration in value.
It is advised that the trading starts with small amounts. It might look like cryptocurrency can bring huge volumes of profit proportional to the volume of investment. However, you will need to build your confidence and expertise to dump a chunk of your savings into crypto trading.
It takes some time for you to build your skills in trading. Until then, it is advised by experts that you divide your position into smaller portions. This strategy helps in creating a ladder of prices. It brings down the risk involved in trading, but at the same time, it averages down the entry price of the position. This division might not result in large profits, but it certainly reduces the possibility of facing a loss in the trade.
Just like the traditional avenues of trading like the stock market and foreign exchange, it is important to ensure risks are efficiently managed. The amount you are willing to risk should clearly be defined with the conscious consent for losing the entire amount. Above everything, it is important to set a stop-loss level, so your loss is not as drastic as it would have been if not!
It is important to take note of situations that might result in price manipulations. The likelihood of something like this happening in an unregulated market like cryptocurrency is quite high. This implies that a market-mover can make easy money when creating an opposing price move. This forces those positions to liquidate, and this might result in an artificially manipulated price for the crypto coin.
Since cryptocurrencies are extremely unregulated, they can be proportionally volatile. Given this attribute, it is highly recommended that traders capitalize on short-term trading positions. In addition to that, the legislative stance of the government and regulatory bodies can have a tremendous impact on the prices of crypto assets. Therefore, it is recommended that you keep a tab on the events and announcements surrounding the crypto space.
Introducing the liquidation price concept
Although it might seem like a curse at the first look, liquidation price is one of the greatest advantages that stand to the benefit of the trader when it comes to margin trading. It ensures that the trailer does not suffer any more losses than the capital that they initially have period to ensure that this ratio is maintained the exchange introduces a multiplier by which the engine shuts down the possibilities of trading when the liquidation price is reached.
For example, if a trader buys crypto assets at a 2:1 leverage, it means that they can buy assets worth $2000 even if they have $1000. Let’s say they buy two bitcoins, each valued at $1000. The liquidation price is generally set in such a way that it serves as a nullifier for the multiplier. In this case, it is set around $1000, so even if there is a loss, the trailer does not lose any more than the initial $1000 in addition to the taxes and commissions.
The introduction of new cryptocurrencies with every passing day, the creation of cryptocurrency exchanges as a profitable business has necessitated the need for margin trading. It is only when such lucrative offers are introduced that expert traders will look to shift their focus from traditional trading avenues like stocks and foreign exchange to new-age trading of crypto exchanges.
At the same time, it cannot be forgotten and denied that just like any other classic market, even cryptocurrency trading has its own share of advantages and disadvantages when it comes to leverage. A crypto trading platform with leverage should ensure that it educates all the traders with respect to the pros and cons. If done properly, there is no question of bitcoin margin trading exchanges will become mainstream avenues of creating profit from the crypto realm.