Crypto leveraged trading is a popular product and crypto trading instrument.
- Crypto leverage trading can be tempting for potentially quick profits.
- There are a lot of risks you should be aware of before you start trading crypto leverage.
- Leveraged tokens are the trading instrument with the lowest risk.
Ready to start? Compare the best crypto leverage trading platforms.
What Different Crypto Leverage Trading Instruments are there?
There are four different main categories of crypto trading instruments with leverage
- Margin Trading – Spot Trading with Borrowed Funds (Not Derivative)
- Leveraged Tokens – Usually, a basket of perpetuals
- Futures and Perpetuals
- Options
1. Crypto Margin Trading
Margin trading is spot trading with leverage. Therefore, margin trading allows leverage trading but is not derivative trading. Read more about the best crypto margin trading exchanges.
2. Crypto Leveraged Tokens
Leveraged tokens are financial products that track an underlying asset’s price movements. The tracking is done using derivative instruments to multiply your earnings. Read more about the best leveraged token crypto trading sites.
3. Futures and Perpetuals
Futures and perpetuals are contracts to buy or sell the underlying asset for a specific price in the future.
- Futures are settled on a predetermined specific date
- Perpetuals are “open-ended” futures with no specific settlement day
Both are available with high leverage and are often denominated in USDT, but there are USDC and BUSD-denominated contracts.
4. Crypto Options
Crypto options are contracts between buyers and sellers. Here, you pay a premie to have the option to buy or sell the underlying asset for a specific price at a particular date in the future. Read more about the best crypto option trading sites.
What is Crypto Leverage Trading?
➤Crypto leverage trading allows you to open a crypto trading position using a small amount of capital to take a much more significant role in the market.
With crypto leverage trading, you bicycle upwards and downward compared to spot trading when you walk in both directions.
Derivative trading means you don’t trade the actual underlying asset in the spot market but a product deriving its price from the underlying asset.
Can you give an example of leverage trading in everyday life?
Most people use leverage trading when they buy a house or an apartment.
They put a small amount in their savings account and lend the rest to the bank. The bank allows this because they receive interest payments every month from you by providing this service.
What does it mean I don’t own the underlying asset?
When you buy Bitcoin on the crypto spot market, you get real Bitcoin. However, if you long Bitcoin on the perpetual market, you sign a contract to accept Bitcoin for a specific price at some point.
Do I have loan funds to trade with leverage?
Yes and No. For perpetual and futures, you have to borrow funds. You technically borrow funds for leveraged tokens, but it’s included in the fee model. Leveraged tokens are a simplified version of leverage trading. For options trading, you don´t have to borrow funds since you only pay a small upfront premium for the option to buy or sell an asset.
What is the maximum leverage?
Crypto Leverage Trading Long VS Short
➤Crypto leverage trading allows you to go long and short in the market.
- Going long in the market means you will profit from a bull market.
- Going short in a market means you will profit from a bear market.
Crypto Leverage Trading -Short Term Investing
➤Crypto leverage trading is only for short-term trading.
Many people would even call it gambling.
- You pay interest on your borrowed funds which makes leverage trading costly
- Your position will experience volatility decay over time which means you will lose in a volatile and flat market
- Remember if the spread is 0.1% and you trade with 100x, the spread is suddenly 10%.
Crypto Leverage Trading Risks
Most people must experience this to understand how quickly you can get liquidated in volatile markets like cryptocurrencies.
Still, you must understand the terms and concepts before using leverage.
Certain events can be triggered during a leveraged trade
- Margin Level
- Margin Call
- Liquidation
- Insurance funds
What is the crypto margin level?
Crypto margin level is a measurement to keep track of your funds to make sure you don´t end up in a negative balance.
There are two main different margin levels
- Cross margin level = Total Asset Value of the Cross Margin Account / (Total Liabilities + Outstanding Interest)
- Isolated margin level = Total Value of Assets in the Isolated Margin Account / (Total Liabilities + Unpaid Interest)
What is a crypto margin call?
The crypto trading exchange sends a margin call if the margin level decreases too much.
A margin call is the first step to warn the trader that the position can liquidate.
Crypto Leverage Trading Liquidation
If your margin level falls under the liquidation trigger level, your position will be closed on the market.
The loan will be paid back first, and a certain liquidation fee will often be charged.
After this, if any funds remain, you will get them into your account.
Crypto Leverage Trading Insurance Funds
Some exchanges have insurance funds to be able to pay if liquidation doesn’t manage to close the position over the liquidation price.
