Bitcoin and crypto trading is a lucrative investment opportunity. However, you have to play your cards well to make the most of the trading.
There are various ways of trading bitcoin and other cryptocurrencies that you can employ. You could choose to do spot trading, cryptocurrency CFDs trading or futures trading. Spot trading requires very huge investments of actual bitcoins or cryptocurrencies for you to make huge profits.
The other two cryptocurrency CFDs trading and futures trading does not necessarily require huge investments for you to make large profits since most of the exchanges and brokers allow leveraged trading on these financial instruments.
What is trading bitcoin & crypto with leverage?
Leverage acts as a loan to the trader by the exchange. The exchange gives the trader a certain amount of funds, depending on the chosen leverage, to cater for the collateral required for a trade. The amount of funds given by the exchange goes directly into filling in the gap in the required collateral and never gets into the traders’ account.
Leverage allows traders to open trades that are larger than the amount of capital they have in their trading account. This allows individual traders to hold large trades and thus make more profits instead of only holding very small trades as their account balance would allow, which would result in smaller profit margins.
Different crypto exchanges offer different leverages. Therefore, you have to be extra careful when looking for a crypto exchange to trade with if you are looking to trade bitcoin and crypto with leverage.
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One of the best financial instruments to trade bitcoin and crypto with leverage are futures contracts. Almost every exchange that offers futures trading allows margin trading using leverage. The only caution is getting an exchange that offers large leverages since most offer leverage of between 50x and 100x.
How does leverage work when trading?
When opening a trade, for instance, a futures contract, you will be required to foot for the contract value which is the amount of buying the number of futures contracts you want. The more the contracts you want to purchase, the more the profit margin if your predictions are correct. But at the same time, the contract value that you are supposed to foot goes high.
If you are using leverage trading, you will pay a portion of the contract value and the exchange pays the other portion of the contract value. For example, if you choose to open a market order of a contract value worth 20,000 USDT in BTCC, the trade will only cost you about 133 USDT as collateral if you are using a leverage of 150x.
If you chose to use smaller leverage, you would be required to pay higher collateral. If you used the leverage of 50x for example, you would be required to pay collateral of 400 USDT.
And if you were to trade without collateral, you would require to have more than 20,000 USDT in your account to open the trade.
How leverage affects the profit
When using leverage trading, you can use lesser funds from your trading account to open large trades than you would possibly have opened if you were to trade without using leverage.
For most individual traders, having an account balance of over 1000 is difficult, which means they can only open trades worth less than 1000 if they were to trade without using leverage.
If you open a small trade and your market prediction is correct, you will make a smaller profit compared to if the trade was large.
Let us take an example of two traders A and B. let us assume both traders have an account balance of 150 USDT.
Trader A used the leverage of 150x to open a BTC/USDT market order futures contract worth 20,000 USDT, meaning he only uses about 133 USDT from his account balance. If the market prices made a 20% increase by the time the contract expires, the trader will have made a profit of 20% of 20,000 USDT, which translates to 4,000 USDT.
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Trader B, on the other hand, decides to trade without using any leverage and probably uses about 135 USDT to avoid using all the amount in his account balance on one trade, although he will still have stretched his account to the limits. If the two traders opened the trades at the same time and both made correct market predictions, trader B would only make 27 USDT profit at the time the contract expires after the 20% increase in market prices of the underlying asset.
The two traders would have invested about the same amount in the trades but trader A makes more profit than trader B only because trader A traded using leverage while trader B didn’t trade using leverage.
Leverage trading is a two-edged sword
It is always important to look at both sides of the coin when trading.
Although trading bitcoin and crypto with leverage enables you to make more profits by investing a smaller amount of funds, it also magnifies the amount of loss by the same factor.
In the above example, if the market predictions of the two traders were wrong and the market prices of the underlying financial asset dropped by 20%, trader A would have lost 70% of the invested 133 USDT since the contract would have been liquidated after the stop out the ratio of 30% is reached (in the case of trading on BTCC exchange). That would mean that trader A would have made a loss of about 93.1 USDT.
Most exchanges offering marketing trading with leverage have a stop out ratio that acts as a negative balance account protection mechanism to ensure that the trade is closed before the loss drops to negative. Otherwise, the accounts of traders using leverage to trade would be wiped clean and move into negatives, meaning the trader would require to deposit more funds to pay for the negative figure and have some amount of funds remaining in the account for trading.
About BTCC: BTCC is a 9-year-old crypto exchange and now provides bitcoin leverage trading and the total trading reached 98 billion USDT contracts in the last 30 days, especially in the Korean crypto market (비트 코인 선물).