How to Trade Cryptocurrencies Using Borrowed Capital
The thought of investing in cryptocurrencies is exciting up until you get to the point where you purchase the assets. Of course, there are some cryptocurrencies such as Dogecoin and Shiba Inu that you buy in huge quantities because of their lower per unit cost. However, there are others such as Bitcoin and Ethereum whose cost per unit is relatively high. The easiest way to open positions in these trades is through fractional investing.
Leaving all that aside, the question of how much of your money you should put in a crypto trade is important to consider. If you have $1,000 you want to invest in crypto, putting all of it in a single trade can be limiting and the profit may not be as substantial. However, did you know that with margin trading, the same $1,000 can afford you positions in a couple of crypto assets?
If the concept of margin trading is new to you or you want tolearn more about how leverage works, you are in the right place. This article will help you to not only understand leverage but also how to get started in margin trading.
What Does Leverage Mean in Crypto Trading?
If you are a beginner in crypto trading, trying to understand leverage can get you a little mixed up. Notwithstanding, it is crucial to make sense of the concept of leverage before you begin experimenting with it.
Leverage allows you to trade with more capital than you have in your respective crypto wallet. Depending on the exchange you trade on, you could borrow up to 1000 times the balance you have in your account. For instance, the PrimeXBT trading platform allows you to borrow up to 1000 times your account balance depending on the asset you want to trade.
Leverage is usually expressed as a ratio. For instance, 1:5 leverage means that you can borrow up to 5 times your account balance. A ratio of 1:20 means you can borrow up to 20 times and so forth. In summary, leverage amplifies your buying and selling power. Take a case where you have $100 in your wallet. To open a position valued at $1000, you need 10x leverage.
Leveraged Trading and How It Works?
Before you borrow funds to open leveraged positions, you must first deposit your own funds into the trading account. The size of the deposit or collateral depends on the value of the position you want to enter and the leverage to use.
Assume you want to open an Ethereum position valued at $1,000 and the leverage available on the trading platform is 10x. The margin you’ll need is 1/10 *$1,000 which equates to $100. On the other hand, if the leverage is 20x, you’ll need to deposit 1/20 * $1,000 which gives you $50. Therefore, the higher the leverage, the lower the required margin. However, you must bear in mind that higher leverages come with higher risks of having your positions liquidated.
Trading platforms require that you maintain a buffer known as a margin threshold. This buffer helps absorb market shocks coming from unfavorable price action. For instance, if the price moves against your position and the margin falls below the maintenance threshold, you’ll get a margin call or notification to put in more funds.
Traders can apply leverage to both long and short positions. In a long position, you buy a crypto asset at a lower price expecting the price to go up and sell it at a higher price. With 10x leverage, you can open a $10,000 position with only $1000. If the asset price goes up by 20%, you will gain $2,000 minus fees. Without leverage, you would have gained only $200. Short positions allow you to benefit when asset prices fall.
Conclusion
As a beginner in margin trading, don’t max out on the leverage. Rather, use lower leverage to give you more margin of error trading legroom. You can also embed risk management strategies such as stop loss and take profit to close your position. This will help you minimize or avoid losses altogether. In whatever you do, always be watchful of the double-edged sword that is leveraged trading.
