The crypto market is crazy right now. Not only are we discovering new ways of making passive income, but we’re also discovering new ways to trade cryptocurrencies. Thanks to these discoveries, we can now engage in something that is called leverage trading. Whether you’re fond of these changes isn’t necessarily important. What’s important is that they do exist.
But what is leverage trading in the crypto market, and why is it important? For the avid crypto investor that trades thousands of dollars every month, leverage trading can be extremely profitable. It can also destroy your investments and everything you’ve worked on for years.
Leveraged trading is just as volatile as the crypto market. In this guide, we will explain what leverage trading in the crypto market is and how you can use it to your advantage.
What Is Leverage Trading In the Crypto Market?
Trading with cryptocurrencies can be done in many ways. You don’t require a large amount of capital to start, but that does mean you have to slowly build your wealth. What happens if you want to skip this part? For avid traders that want to increase their buying power, leverage trading is the means to achieve that.
Leverage trading essentially allows you to borrow money from an exchange and potentially make big profits. As we mentioned in a previous statement, you can easily lose your entire investment. But that doesn’t explain what leverage trading in the crypto market is. Leveraged trading works through a new type of token called leverage token. A leveraged token allows you to take leverage on a particular cryptocurrency.
What this means is that your profits and losses are multiplied depending on the leverage position. A 5X leverage token will increase your profits by five times. But since it’s a double-edged sword, it works the other way around if the price of the cryptocurrency decrease.
Let’s assume that you’re buying a leverage token on a cryptocurrency that has a ratio of 1:10. What this means is that if you take $100 on Bitcoin, you are buying $1,000 worth of Bitcoin with only $100. The amount you’ve invested in is called a margin. The cryptocurrency exchanges use the margin as collateral in the case the price collapses. This makes margin trading extremely risky. Hence why you should do it only if you have a high-risk tolerance.
But how do you assess that risk? To determine if leverage trading works for you, here are a few things to consider.
Leverage Trading Is Highly Risky
To trade on leverage, you need to find a cryptocurrency exchange that allows you to set up a margin account. Since leverage trading in the crypto market is highly risky, not every crypto exchange has this feature. In the US, very few crypto exchanges have this option. While most of you are familiar with the Gemini vs Coinbase debate, did you know that Gemini doesn’t support this feature while Coinbase has had it since 2020?
That’s one more thing to take into account when setting up an account with a cryptocurrency exchange. But why is leverage trading so risky? If you’re a total beginner and have no idea how the crypto market works, leverage trading isn’t something you should be doing. Cryptocurrencies follow an unpredictable pattern that isn’t backed by any technical or analytical data. Thus, it requires a strong understanding of global markets to know if a particular cryptocurrency will grow or fall in price.
If you take a 3X leverage on a coin and that coin happens to fail, you’ll be losing your investment.
Not Every Exchange Has It
As we mentioned in the previous point, not every cryptocurrency exchange supports leverage trading. As a matter of fact, not even the top crypto exchanges allow it. While Coinbase does support it, many others don’t. Due to the high-risk factor and market volatility, many of the best crypto exchanges opt against it. Leverage trading can also be done through one crypto exchange that supports it and onto another that has your desired leveraged tokens.
A popular method that many US traders do is to deposit money to Coinbase and use the leverage trading feature to buy a stablecoin currency. They then transfer the stablecoin with a 3X leverage to another exchange, such as KuCoin or Kraken, that supports particular leveraged tokens.
While these are popular ways to leverage a position on a particular token, that doesn’t mean these tokens won’t be added to Coinbase. For example, Kraken is another crypto exchange that allows leverage trading. Kraken supports leverage trading on Bitcoin, Ethereum, Tether, Monero, Ethereum Classic, Ripple, EOS, Tron, Chainlink, Tezos, Cardano, and dozens more. These are some of the most popular cryptocurrencies with high liquidity.
Despite All That, Leverage Trading Is Very Simple
While leverage trading is risky and susceptible to the negative impact of price volatility, it is a very popular method of investing. Avid traders know that margin trading is highly complex and requires a lot from the investor. But leverage trading is different. While they are similar, both types of trading are inherently different. Since leverage trading uses leveraged tokens, the only difficulty is identifying a cryptocurrency exchange that supports the tokens.
Even if leverage trading is risky, there is a thing called rebalancing. Rebalancing is a means to maintain a level of token risk. Leveraged tokens rebalance every day. If the token declines, then rebalancing will sell off some of your position to maintain risk tolerance.
This is a simple method that proves to be highly attractive to avid cryptocurrency traders.
Finishing Thoughts
Leverage trading can be a great way to increase profits when trading on the crypto market. But leverage trading also comes with risks. A beginner shouldn’t do it as it requires significant global market knowledge. You’re betting off learning how to analyze the market first before engaging in it.
But if done correctly, leverage trading can be a great way to invest with a larger amount of capital and make bigger profits.
Partner at Vega Capital Management - a private funds management company.
An experienced portfolio manager with 10+ years of proven and reputable track record in investment management and financial analysis. Currently, a partner at one of the fastest-growing private fund management companies in southeast Europe, Kiril has been tending to a loyal international base of client-investors and partners. When he is not crunching numbers and increasing his client’s wealth, he reminisces about his Michelin-star restaurant cheffing years and fondness of the culinary arts.
