How to start crypto leverage trading

Leverage trading, also known as margin trading or trading on margin, is a strategy that traders use to maximise their gains.

But it’s worth noting that while leverage can bring potential profit, it may also result in substantial losses. Hence, it’s crucial to use it with caution.

If you are interested in cryptocurrencies and wondering how to start crypto leverage trading, check out this handy guide.

 

What is crypto leverage trading?

Crypto leverage trading is a technique that allows you to make larger trades in the market by using borrowed funds and less upfront capital from your pocket.

It’s similar to having a financial boost to amplify your trading potential. Instead of just using your money, you can control a much more prominent position with less capital.

However, as an aspiring crypto trader, always note that while leverage can amplify your gains, it can also magnify your losses.

If the market moves against you, you could lose more than your initial capital and end up losing more than what you borrowed.

You will have to repay the monetary value of the size of your trade, not what you invested.

3 common crypto leverage trading instruments

Before you begin using leverage for trading, it’s important to understand the different kinds of crypto derivatives.

During your research, you’ll probably come across common instruments such as futures, swaps, and perpetual contracts.

1.    Crypto futures

Cryptocurrency futures are financial contracts with expiration dates, that allow you to speculate on the future price movements of cryptocurrencies, without actually owning the underlying assets.

Let's say it's currently the first day of January, and you believe that the price of Ethereum (ETH) will increase in the next three months. You have decided to enter an ETH future with an expiration date on the first day of April.

The contract specifies that you will buy one ETH for $60,000 on the first day of April, regardless of the current market price.

Check out this article: Understanding Crypto CFDs: Advantages and Risks

2.    Crypto swaps

We’ll explain crypto swapping using a simple scenario. Let’s say you are holding a particular type of cryptocurrency called Crypto A.

Eventually, you become interested in getting another cryptocurrency, Crypto B, because you think it might grow in value.

Instead of selling your Crypto A to get funds to buy Crypto B, you decide to swap cryptos. That is how this instrument works. 

3.    Crypto perpetual

Perpetual contracts are a bit different. They’re like a never-ending version of a futures contract. They don’t have an expiration date, so you can hold onto it as long as you want.

Each of these instruments has its perks and risks. Futures can be suitable for planned trades, swaps offer flexibility, and perpetual contracts are good for quick moves.

Just make sure you fully understand how they work before jumping in.

Why consider leverage in crypto trading?

If you’re thinking about hopping into the crypto-verse, you can consider crypto leverage trading. Here is how it may benefit you as a crypto trader:

•       Opportunity for small traders: Leverage allows traders with limited funds to participate in larger trades that they might not afford otherwise. However, it must be used with great caution.
•       Potentially bigger capital gains: Crypto leverage can help you potentially make a lot more through crypto by using high leverage, but it also comes with more risk.
•       Flexibility in trading: With leverage, you can control a larger amount of cryptocurrencies even if you don’t have much funds. Leverage can also be used in contract for difference (CFD) crypto platforms to diversify your trading portfolio and take advantage of various market situations.
•       Access to markets: Leverage provides access to markets that might otherwise be inaccessible due to high entry barriers or capital requirements.

When to use leverage in crypto trading

Leverage trading can be helpful if you’re confident in identifying how a cryptocurrency’s price will move. You should only use it if you have a solid trading strategy, some trading experience, and know how to conduct fundamental and technical analysis.

Remember that crypto leverage trading increases the risk – if the price moves against you, your losses can be far bigger, too. It’s crucial to be prepared for these potential fluctuations and ensure you have a risk management strategy in place.

Always start with a small position size, especially if you’re new to leverage trading, and consider seeking advice from financial experts or experienced traders to improve your understanding and minimise potential losses.

Easy steps to start crypto leverage trading

If you're new to leveraged crypto trading, don't worry, it's easy to get started. Just follow these five straightforward steps to execute your first crypto leverage trade with confidence:

1. Choose a trading platform you can trust

You’ll need to choose a cryptocurrency CFD platform that offers leverage trading. Not all platforms offer this feature, so research for alternatives and pick a reputable and well-regulated platform.

A trusted global CFD broker, markets.com offers a wide range of CFD assets, including cryptocurrencies.

2. Research and select the crypto you want to trade

Choose the crypto you wish to trade. For instance, if you’re interested in trading Bitcoin, decide on your trade size, then go short or long with it.

3. Decide how much leverage to use

Depending on the asset you’re trading on and the regulations, different leverage limits apply. These are expressed in ratios such as 1:30, 1:50, and so on. The bigger the second number, the higher the leverage, and the riskier the trade. For example, 1:50 means you are getting $50 from the broker for every $1 you spend.

4.  Set aside a margin for the broker

A marginal call refers to the small deposit you give to a trader for the trade. This amount must be held in your account as collateral for the broker.

If you lose money on a leveraged trade, you may end up paying more than you did for your margin.

The higher the leverage ratio, the lower the margin you need to pay. A 1:50 ratio usually has a margin of 2%, while a 1:200 leverage ratio means you pay a 0.5% margin to the broker.

Be cautious and avoid using excessive leverage, as it increases the risk of forced liquidation, which is when you’ll need to sell your assets for cash.

5. Place a leveraged trade

Once you’ve chosen your leverage level, you can enter the amount of cryptocurrency you want to trade and select your trade direction (long or short).

If you place a long trade, it means you anticipate the price will go up, while placing a short trade means you predict the price will drop.

6. Manage your risks and monitor the trade closely

As a protective measure to limit your losses, you can set stop-loss orders. A stop-loss order automatically sells your position if the price moves against your trade beyond a certain threshold.

In addition, you can calculate the potential loss of your entire position in case of liquidation due to a steep price movement.

If the trade moves against you, you can close your leveraged transaction anytime.

Begin your CFD crypto leverage trading at markets.com

Crypto leverage trading can be a complex process as it carries significant risk. However, whether your leveraged trade is successful or not, take the opportunity to learn from your experience.

Become a member and start to practise trading using virtual funds. At markets.com, you can trade a range of CFD cryptos using your preferred level of leverage.

We also provide a CFD trading calculator that you can use to measure hypothetical gains or losses (aggregated cost and charges) if you open a trade today. Try it out for yourself today.

*Cryptocurrency CFDs are banned in the United Kingdom.

When considering "Crypto CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.