Over the past few years, crypto leverage trading has become extremely popular. However, if you ask someone new what is leverage trading crypto? They might find it difficult to explain. Leverage trading crypto is one of those concepts that seems difficult at first, but once you get it, it’s quite easy.
So in this guide, we’ll break everything down as simply as possible. By the end, you’ll understand what leverage is, how leverage works in crypto, when to use it, and when to stay far away.
What is Leverage in Crypto Trading? (Definition)
Leverage in crypto trading is essentially the practice of using borrowed funds to increase your buying or selling power. Think of it as a temporary loan you take from an exchange. With the borrowed funds, you can now trade a much larger amount of an asset than you actually own.
In simpler spot crypto trading, if you have $1,000, you buy $1,000 worth of Bitcoin. If Bitcoin goes up 10%, you make $100. With crypto leverage, you could use that same $1,000 as collateral to open a $10,000 trading position (10x leverage). With a larger trade size, if the Bitcoin price moves up the same 10%, you get a $1,000 profit. However, with bigger potential profits also comes bigger risks.
How Does Leverage Work in Crypto?
Image Credit: IFCMarkets
To understand how does leverage work in crypto, you need to understand the exchange-to-user lending model. The exchanges that give you money to leverage trade are businesses. So, they don’t do it for free.
They need something called Margin to guarantee that they do not lose their money in case your trade fails.
Understanding Margin (Initial vs. Maintenance)
Margin is basically the collateral crypto you deposit to open a larger position. There are two types of margins, and it’s important to understand both of them.
Initial Margin: This is the minimum equity size that you will need to open a leveraged position.
Maintenance Margin: This is the minimum equity that you will need in your account in order to maintain the position. Your account balance falls under this threshold because of market losses, and you are subjected to the feared margin call.
The Multiplier Effect (5x, 10x, 100x)
Leverage is represented as a ratio. This is the multiplier effect. It tells you how many times your initial capital is being increased by. When you see 5x, it means that for every $1, you trade $5.
For 10x, you trade with 10 times your original amount. 100x is usually limited to Bitcoin leverage trading, whereby a deposit of $100 can open a position of $10,000. A very high multiplier has two side effects. While you can earn massive profits, the risks are also great.
A 100x leverage means that any 1% movement against you creates a 100% loss of your collateral. Also, only some of the best crypto margin trading with hightest leverage, like MEXC, offer this kind of multiplier.
Long vs. Short Positions
Cryptocurrency leverage trading is not only available in a bull market. You can also trade in a bear market with leverage. This is where long and short positions come in.
In a Long Position/Longing, you take a loan to purchase an asset, hoping its price will increase. You later sell it back, pay back the loan and grab the difference.
In a Short Position/Shorting, you take the asset (such as BTC) and sell it on the spot. In the event of a price decline, you will repurchase it at a lower price, remit the BTC to the lender and keep the profit.
Isolated Margin vs. Cross Margin
The greatest aspect of how to leverage trade crypto is managing the risk of the different modes. Most of the platforms have two modes:
Isolated Margin: The risk is restricted to a definite trade. In case that trade goes bad, then you lose only a percentage assigned to that position.
Cross Margin: The whole balance of your account serves as collateral. Though this prevents getting liquidated in case of short-term price drop, a bigger drop may automatically empty your wallet.
Different Types of Crypto Leverage Trading
There’s more than one way to approach crypto leverage trading. Depending on the exchange you choose, you can trade several different instruments, including:
Crypto Margin Trading
This is the most popular form of leverage trading. You borrow funds directly from the exchange or other users to buy more spot crypto. It is common with shorter-term plays and it entails the daily payment of interest on the loaned sum.
Crypto Futures & Perpetuals
Futures contracts are used to purchase or sell an asset at a certain price at a specific time in future. In crypto, perpetual Swaps offer more advantages. These are futures that do not expire. They follow a funding rate to remain pegged to the true price of Bitcoin or Ethereum.
Options and CFDs
Options provide you with the right (but not the obligation) to buy or sell at a specific price. More typical in conventional finance, but also available in crypto, CFDs (Contracts for Difference) are just a bet on price change, with you never owning the underlying coin.
You can take leverage from an exchange to trade any of the three types of leverage outlined above.
What is Liquidation in Crypto Leverage Trading?
Image Credit: Binance
Liquidation means game over in cryptocurrency leverage trading. As we explained earlier, exchanges are businesses that can’t take on all the risk of a trader. When they notice that your trade is at a loss and has gotten to the point where your Initial Margin is exhausted, they automatically close your position.
This closing of your position is called liquidation. When you get a liquidation call, it means that you have lost 100% of the collateral that you assigned to that trade. Exchanges do this to prevent their own funds from being lost in your position, and so you don’t get a negative balance.
Spot Trading vs. Crypto Leverage Trading
If you don’t want the risk involved in leverage trading, you can spot trade crypto. While you borrow funds to trade larger positions in crypto leverage trading, in spot trading, you directly buy or sell the crypto at current prices. Below are the main differences between spot trading vs. crypto leverage trading.
| Feature | Spot Trading | Leverage Trading |
| Ownership | You own the actual coins. | You hold a contract/debt. |
| Risk | Low (Price can go to zero, but you don’t lose more than you put in). | High (You can be liquidated instantly). |
| Profit Potential | 1:1 | Multiplied (5x, 10x, 50x). |
| Fees | Small trading fees. | Fees + Interest/Funding rates. |
If you’re new, start with spot trading. We recommend crypto leverage trading for advanced traders who can take on the risk involved.
How to Leverage Trade Crypto: A Quick Guide
Now that you understand how leverage works in crypto, let’s look at how to trade crypto with leverage on an exchange (Binance).
- Choose a Reliable Exchange: Look for one of the best exchanges with deep liquidity. It will help you avoid scam wicks that trigger liquidations.
Source: Binance
- Deposit Collateral: Move USDT or BTC into your Futures or Margin wallet.
Source: Binance
- Select margin mode: Choose the type of leverage/margin you want to trade.
Source: Binance
- Select Your Leverage: Start small. 2x or 3x is plenty for a beginner. Avoid the promise of 100x leverage returns.
Source: Binance
- Set a Stop-Loss: This is non-negotiable. Add a stop-loss to automatically close your trade when it reaches a loss that you can take.
Source: Binance
- Monitor Your Trade: Don’t just open and forget. Track your trades and close/adjust your stop loss to the profit zone when you are in profit.
Note that you might have to pay a fee every 8 hours just to keep the trade open.
Pros and Cons of Bitcoin Leverage Trading
Pros
- Small price movements (1-2%) can yield huge profits.
- You can use a small amount to unlock larger trader sizes.
- If you hold BTC, you can short it with leverage to protect your portfolio during a crash.
Cons
- Crypto leverage is volatile. One small market move can send your balance to zero.
- Watching a leveraged position can be stressful.
- Understanding funding rates, mark prices, and liquidation prices requires a steep learning curve.
Conclusion: Should Beginners Trade Crypto With Leverage?
For beginners, we advise you to trade crypto with leverage with extreme caution. Begin the process only if you have a proven trading strategy and a disciplined approach to risk management. Crypto leverage is a tool for professional growth, not a get-rich-quick scheme.
If you are just starting, stick to spot trading until you understand market cycles. When you do decide to explore crypto leverage trading, start with 2x leverage. And always, always use a stop-loss. This will reduce the risks associated with leverage trading.
FAQs About Crypto Leverage
What is leverage trading crypto in simple terms?
It means borrowing funds to increase your trading position and potential profits.
Can I lose more than my initial investment?
On most modern exchanges, you cannot lose more than your wallet balance (negative balance protection), but you can certainly lose 100% of what you deposited.
Is Bitcoin leverage trading profitable?
BTC leverage trading can be profitable. But profits are not guaranteed, and risks are high.
What is the difference between margin and leverage?
Margin is the collateral you deposit. Leverage is the multiplier applied to it to get a bigger trade size.
What is liquidation in crypto leverage trading?
It’s when your position is automatically closed due to excessive losses. When this happens, you lose all the funds you deposited to get the leverage.
How does leverage work in crypto yield farming?
In farming, you use leverage to borrow a stablecoin against your crypto assets to buy more of the farming token, increasing your share of the pool.
