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While regular crypto trading is already considered risky due to the volatile tendency of this asset class, crypto-leveraged trading is deemed even more daunting. However, a complete grasp of this concept can equip traders with tremendous opportunities, allowing them to capitalize on market swings well-prepared.
On this note, Stake-Hub is a notable financial broker, properly integrating the leveraged crypto trading facility. At this platform, users can benefit from an array of crypto CFDs amid a secure and efficient ecosystem.
What is leverage in crypto trading? How does it work?
The concept of leverage revolves around the utilization of āborrowedā funds to execute trades. By engaging in leveraged crypto trading, you can enhance your ability to buy or sell and open market orders involving much higher sums than what you would have been capable of with your existing capital. In essence, leveraging enables you to pursue magnified potential returns by investing a limited initial amount.
The amount of leverage is typically expressed in ratios like 1:10, 1:20, 1:100, and so on, expressing how many times the initial capital can be multiplied. For instance, a 1:20 or 20x leverage can compound your buying power by 20 times. It means that with only $100, you can open a trade position worth up to $2000 ($100 x 20) by applying a 1:20 leverage.
To start crypto trading with leverage, you have to first deposit a specific amount into your crypto account which will serve as the ācollateral.ā Also known as margin, this amount inversely varies with the applied leverage: a lower margin is required when you implement high leverage whereas a higher margin is needed to open a low-leveraged position.
To explain simply, with leverage of 1:20, you can open a position worth $2000 by using $100 capital. But, with leverage of 1:40, you can open the same $2000 worth position by using only $50 capital.
Also note that contrary to regular spot crypto trading, leveraged crypto trading deals with crypto derivatives like futures contracts or CFDs whereby you do not actually own the underlying assets. Many brokerage forums, like Stake-Hub, allow their clients to engage in leveraged crypto trading for enhanced exposure to the digital currency market.
Leverage is a double-edged sword
Although leverage seems an enticing feature to boost your earnings, you must not overlook the possibility of encountering equally magnified risks.
It is vital to keep in mind that high leverage often equates to high risk, and even the slightest fluctuation in prices can have catastrophic consequences. Remember, as you ride the wave of potential profits, you are equally exposed to the perils of losses.
The more you leverage, the narrower your capacity to tolerate volatility becomes. If your leverage is excessively high, even a meager 1% opposite shift in prices could expose you to colossal losses.
Example of a leveraged BTC position
To better understand the risks and benefits of leverage, hereās a more detailed example. Suppose you open a ābuyā position for BTC with a $1000 capital using 20x leverage, creating a position valued at $20,000. If the BTC price surges by 10%, your profit will amount to $2000, which is significantly higher than the $200 you would have earned without leveraging your capital!
However, if BTC's price drops by 10%, you will face a $2000 loss. Since your original capital was only $1000, a 10% plunge will trigger liquidation and wipe out your account.
Therefore, be aware of the dual sides of leverage. While it can boost your profits, it can also amplify your losses. Ultimately, it is crucial to exercise caution and conduct thorough research before deciding to associate with leveraged crypto trading.
Main Image: An illustration of risk-reward leverage by iStockPhoto
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.