Cryptocurrency trading is now part of many portfolios, and it is the only asset class that trades 24/7 with high liquidity. The market cap only trails that of the Forex market, where the trading infrastructure is identical, except for the maximum leverage. Have you wondered how much crypto trading leverage you can get and how it works?
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Learn the pros and cons of trading with leveraged accounts to make an informed decision about crypto trading leverage and to avoid its pitfalls.
An Overview of Leveraged Trading in Crypto
Traders require competitive trading tools to gain an edge, and leverage is the best trading tool available, but only for traders who understand how to use it. Regrettably, most traders misuse or do not know how to use crypto trading leverage. Even regulators seem to lack knowledge in this regard, based on their actions concerning leverage-related legislation.
Leverage is an essential trading tool, and without crypto trading leverage, most traders cannot trade digital assets effectively or economically.
Here is what you need to know about crypto trading leverage:
- Leverage does not increase risk, but the absence of proper risk management does
- Leverage decreases the margin requirement to open and maintain positions
- Leverage affects the position trade size
- The position trade size affects risk management
- Higher leverage may trigger risk management protocols faster. Therefore, trade size management is essential
How Does Leveraged Trading Work?
Crypto trading leverage offers a capital injection by decreasing the margin requirement to open and hold positions. For example, 1:100 crypto trading leverage means that for each $1, traders can control a $100 position. Therefore, traders can achieve greater diversification with smaller portfolios or increase their earnings potential by borrowing capital from their brokers.
Please note that leverage also magnifies downside moves, and traders must adjust their risk management and transaction sizes accordingly. It also increases final trading costs for traders who keep leveraged positions open past the swap rate cutoff time, usually 17:00 EST, as brokers charge financing rates known as swap rates. The trading platform lists applicable swap rates under trading specifications.
MT4 and MT5 traders can access swap rates from their platform by following these steps:
1. Right-click the desired symbol in the Market Watch window and select Specification.
2. Scroll down until you see Swap Long and Swap Short.
How to Trade Crypto with Leverage
Trading crypto with leverage is necessary for traders, as it increases the competitiveness of trading accounts. Before using crypto trading leverage, traders must understand the potential risks involved and the best ways to mitigate their exposure.
What Is the Best Leverage for Crypto Trading?
The best leverage for crypto trading is the maximum available, so long as traders understand how it will impact trade size and risk management. Otherwise, leverage should not be used at all.
The Risks of Leveraged Trading in Cryptocurrencies
The core risks of crypto trading leverage are a lack of knowledge on using it, total portfolio loss, inadequate risk management, improper trade size management, undercapitalized portfolios, and overtrading.
Leverage Trading in Crypto – Pros and Cons
Cryptocurrency traders must consider the pros and cons of leverage trading in crypto before trading leveraged accounts.
The Pros of Leverage Trading in Crypto
- An increase in trading opportunities amid a decrease in the margin requirement
- A more diversified portfolio with less capital
- An increase in the profit potential
- A more efficient use of capital
The Pros of Leverage Trading in Crypto
- Magnified downside moves
- Many traders apply leverage to undercapitalized portfolios
- Overtrading
- Inappropriate transaction sizes
- Misunderstanding of how leverage impacts trade sizes
- Misunderstanding how risk management relates to leverage
- Lack of appropriate risk management
My Take
Understand that leverage does not increase your exposure. For example, if you set risk management at 3% of your account balance on a $10,000 account, you will lose $300, whether you have a leverage ratio of 1:1 or 1:1000. It is risk management and lot size management in leveraged trading, which determines risk, not the leverage ratio.
