For many people, leverage trading can be confusing, especially for newcomers entering this field. However, before deciding to try using leverage, a thorough understanding of its meaning and operation mechanism is crucial. This article will focus on leverage trading in the cryptocurrency market, but a lot of the key information is also applicable in traditional markets.
Leverage, in a nutshell, is the use of borrowed funds to trade cryptocurrencies or other financial assets. Through leverage, you can greatly expand the scale of your trading funds, far beyond the actual amount of funds you currently have in your wallet. Specifically, depending on the cryptocurrency trading platform you choose, you even have the opportunity to borrow funds up to a hundred times the balance of your account.
Leverage multiples are usually presented in the form of ratios, such as 1:5 (meaning 5 times leverage), 1:10 (10 times leverage), or 1:20 (20 times leverage), etc. This ratio clearly shows the magnification of your initial funds. For example, suppose you only have $100 in your trading platform account, but you expect to open a Bitcoin (BTC) position worth $1,000. If you use 10 times leverage, then your initial $100 will instantly have the purchasing power equivalent to $1,000.
You can use leverage to trade a variety of different cryptocurrency derivatives, and common types include margin trading, leveraged tokens, and futures contracts.
When you start margin trading, you first need to deliver the principal according to a specific proportion of the total value of the order. This initial investment is called the "margin", which is closely related to the concept of leverage.
Essentially, the margin trading account is the basis for creating leverage trading, and "leverage" refers to the ratio of borrowed funds to the margin. For example, if you build a transaction with a total value of $100,000 with a leverage of 10:1, then you need to pay $10,000 in advance as the principal.
It should be noted that different trading platforms and markets have their own unique rules and leverage ratios. In the stock market, the leverage ratio is usually set at 2:1; for futures contracts, the common leverage ratio for trading is usually 15:1.
Foreign exchange brokerage companies generally set a leverage of 50:1 for margin trading, and in some specific situations, it may even be as high as 100:1 or 200:1. In the cryptocurrency market, the leverage ratio is usually between 2:1 and 100:1. In the trading community, people usually use the term "x" (times) to refer to leverage (such as 2x, 5x, 10x, 50x, etc.).
The most significant advantage of margin trading is that it can significantly increase the relative value of the trading position, thereby creating extreme profits for investors. Secondly, traders can use margin trading to open multiple positions with a relatively small investment principal, thereby obtaining diversified investment opportunities. Finally, traders with margin accounts do not need to transfer huge amounts of funds into the account and can quickly and conveniently establish positions.
However, this amplification effect is actually a "double-edged sword". When suffering losses, margin trading will amplify the losses in the same way, making the investor's situation worse. Different from regular spot trading, the losses caused by margin trading are very likely to exceed the trader's initial investment, so it is widely regarded as a high-risk trading method.
According to the leverage multiple uses, even a small drop in market prices may bring huge losses to traders. Therefore, investors participating in margin trading must strictly follow a reasonable risk management strategy and make full use of risk mitigation tools such as limiting stop-profit and stop-loss orders to effectively reduce potential risks.
Margin Trading in the Cryptocurrency Market: Compared to regular trading, margin trading itself contains more significant inherent risks. And when combined with cryptocurrencies, the risk level increases exponentially. Given the extremely volatile fluctuations in the cryptocurrency market, participants in margin trading in this field must be doubly cautious. Although hedging and risk management strategies may play a certain role, margin trading is undoubtedly not suitable for novice traders.
By deeply analyzing charts, accurately identifying trends, and precisely determining the price points for buying and selling, it cannot completely eliminate the risks involved in margin trading, but it helps to predict risks more accurately and conduct trading activities efficiently.
Therefore, before applying leverage to cryptocurrency trading, it is strongly recommended that users first cultivate their keen insight into technical analysis and accumulate rich and solid experience in spot trading.
For those investors who are not yet capable of bearing the risks of margin trading, there is another way to profit from margin trading. Some trading platforms and cryptocurrency exchanges offer the function of "margin funds", where users can provide funds to support the margin trading of other users.
This process usually follows specific terms and generates dynamic interest rates. If traders agree to the relevant terms and accept the offer, the fund provider has the right to receive loan repayments in accordance with the agreed interest.
Although such mechanisms may vary by exchange, the risk of providing margin funds to other users is relatively low given that leveraged positions can be forcibly closed to avoid excessive losses. In addition, margin funds require users to deposit funds into the trading platform's wallet. Users must carefully consider the risks they face and clearly understand the specific operation of this function on the selected trading platform.
You first need to deposit funds into your trading account before you are eligible to borrow funds and start leverage trading. The initial funds you provide are called collateral. The amount of collateral required depends on the leverage multiple you use and the total value you expect to build a position (this is called margin).
Suppose you expect to invest $1,000 in Ethereum (ETH) with 10 times leverage. Then, the required margin is 1/10 of $1,000, that is, you need to have $100 in your account as collateral for borrowing funds. If you use 20 times leverage, the required margin will be lower ($1,000's 1/20, that is, $50). But please keep in mind that the higher the leverage multiple, the higher the risk of forced liquidation.
In addition to the initial margin deposit, you also need to maintain a specific margin threshold for your trading. When the market trend is unfavorable to your position and the margin is lower than this maintenance threshold, you need to inject more funds into the account to avoid the risk of forced liquidation. This threshold is also called the maintenance margin.
Leverage can be applied to both long positions and short positions. Establishing a long position means you expect the asset price to rise. Conversely, establishing a short position means you expect the asset price to fall. Although this sounds similar to regular spot trading on the surface, by using leverage, you can buy and sell assets based only on collateral rather than the size of the funds you hold. Therefore, if you think the market will go down, even if you do not hold assets, you can borrow assets and then sell them (thus establishing a short position).
As mentioned earlier, the primary reason why traders choose to use leverage is to significantly increase the size of the position and potential profit space. However, the examples above also clearly show that leverage trading can also lead to more severe losses.
Another key reason why traders use leverage is that it can effectively increase the liquidity of funds. For example, compared to holding a position with 2 times leverage on a single trading platform, traders can use 4 times leverage to maintain the same size of the position with a lower collateral. In this way, they can flexibly use the other part of the funds in other areas (such as trading another asset, participating in staking equity, injecting liquidity into decentralized trading platforms (DEX), investing in NFTs, etc.).
High-leverage trading may require relatively less initial capital, but at the same time, it significantly increases the probability of forced liquidation. If the leverage you use is too high, even a 1% price fluctuation may cause huge losses.
The higher the leverage multiple, the lower your tolerance for price fluctuations. Conversely, the lower the leverage used, the higher the fault tolerance of the transaction. This is the fundamental reason why Binance and other cryptocurrency trading platforms limit the maximum leverage available to new users.
Risk management strategies such as stop-loss orders and stop-profit orders play a key role in minimizing losses in leverage trading. You can set a stop-loss order to automatically close the position at a specific price, which is particularly useful when the market fluctuations are unfavorable to you. Stop-loss orders can effectively prevent you from suffering significant losses.
Stop-profit orders are the opposite. It will automatically close the position when your profit reaches a predetermined value. This can ensure that you effectively lock in profits before the market situation changes.
At this point, you should already be clear that leverage trading is like a double-edged sword, which can multiply your profits and may also lead to the same degree of losses. It involves extremely high risks, especially in the frequently fluctuating cryptocurrency market. Binance advises you to be responsible for your trading behavior and stay rational.
We provide tools such as anti-addiction notifications and cooling-off period functions to assist you in effectively controlling trading. You should always stay alert and never forget to do your own thorough research (DYOR), deeply understand how to use leverage correctly and carefully plan your trading strategy.
You can use leverage to trade cryptocurrencies on cryptocurrency trading platforms such as exchanges. Next, we will show you in detail how to conduct margin trading, but it should be noted that the concept of leverage also exists in other types of trading.
First, you need to have a margin account. If you do not have a margin account yet, please open one according to the relevant FAQ articles.
