Blog Crypto How Leverage Trading Crypto Works: Should You Try It?

How Leverage Trading Crypto Works: Should You Try It?

date February 27, 2022 time 5 min read 2004 views

Leverage trading on crypto might not be something of interest to someone you’d pluck out at random in a line-up, so if it’s on your radar, more power to you. Leveraging can certainly be a fantastic way to get the most out of your investments to earn compound interest—but make sure you know what you’re doing first. Here’s a good place to start.

Leveraging is all about using debt or borrowed capital to fund your investments—depending on your existing preconceptions, that could make you yawn or strike fear in your heart. The technique has been around for decades on the financial markets, but it’s only recently that the trend for leverage trading crypto has started to pick up speed. 

Wondering what leverage trading crypto is, how it works, and whether to get involved? If you’re brave enough to stick around, we’ll cover the complexities, the dangers, and the opportunities. Just don’t do anything crazy until you’re fully informed. 

Introducing leverage trading

As we’ve touched on already, leverage trading is a form of trading that involves borrowing money. In everyday life, we say that we have “leverage” when we have something we can use to our advantage. For example, you might say you have leverage when negotiating for a pay rise if another employer has offered you a better salary.

In the trading world, the advantage in question is extra capital. Traders use leverage by borrowing, which allows them to invest more than they would have been able to manage if they were limited to their own funds. The more you have invested, the more potential there is for higher potential returns, which explains the popularity of the practice (although it also means greater potential losses if things go wrong).

History of leverage trading

It’s hard to trace the exact origins of leverage trading, but it’s probably existed in some form for the last hundred years. However, leverage trading mostly entered the public imagination when things started going wrong.

Leverage is believed to have contributed to the 1929 stock market crash—there was little to no regulation for banks or investors, meaning traders could access huge amounts of leverage. As we all now know, the results were brutal. Although the world learned something from the experience, leverage has since contributed to other crashes, such as the 2008 financial crisis.

You might be thinking that this doesn’t bode well for you, and we don’t blame you. However, leverage can still be a useful crypto trading tool if you use it wisely. Besides, it’s used all the time—something as simple as a mortgage is a form of leverage.

Margin trading 

If you’re active in the world of crypto trading, you might be familiar with margin trading. This is a form of leverage trading focused on using another position (e.g., securities) as collateral to increase your buying power. Your margin dictates how much leverage you can access—for instance, you might need a margin of 5% to be able to access leverage.

Leverage and margin trading in crypto are advanced techniques, but they can be profitable for some.
Leverage and margin trading in crypto are advanced techniques, but they can be profitable for some. (Source: Unsplash)

So, margin trading in crypto might mean that you deposit $1,000 on a crypto broker like Kraken and use that to access leverage of $5,000, with Kraken giving you the remaining $4,000.

What is leverage trading in crypto?

Now, it’s time to get specific about crypto. The process is exactly the same as what we’ve seen already—the only difference is that you’re working in cryptocurrencies and not in dollars. 

The area only emerged recently, but it’s now available in various places. Some of the most popular crypto platforms to support leveraged trading include:

This list would probably be longer if it wasn’t for the regulatory challenges—crypto platforms face enough problems and pushback without trying to bring leverage into the equation. But who knows, maybe in a few years the practice will become just as commonplace as borrowing from traditional brokers or p2p crypto lending platforms?

Opportunities of leverage trading crypto

Leverage trading crypto provides a unique opportunity to skyrocket the value of your investments. If you’re convinced that a new crypto will be successful but can’t quite invest as much as you’d like, leverage provides a way for you to go all-in.

Let’s say that you invested $100 into FTT coin today, and it generated a 10% return after one month; you’d have a profit of $10. But if you’d used leverage to borrow ten times more than your original $100, you could end up with a profit of $1000 instead. 

Leverage is something that banks and businesses do all the time. Why shouldn’t everyday folk be able to get in on the action and reap the rewards too? Hashtag to the moon.

Risks of leverage trading crypto

Even crypto trading that follows the standard approach comes with its fair share of investment risks, with no guarantee you’ll make money. So, you can only imagine the amount of uncertainty involved when you also bring in borrowing. The crypto market is famously vulnerable and hard to predict—a coin will pop up out of nowhere and increase 500% in a month, while another will drop into obscurity. Betting on a crypto to the point where you take on leverage requires serious cojones.

Using the example of FTT coin above, you’d lose hundreds of dollars more than the original $100 you invested. Ouch. However, as long as you quantify your risks and follow the good old rule of not investing more than you can afford to lose, you should be good as gold. Beginners stay away, though.

A bonus: Shorting crypto

Chances are that your head is spinning right now. But if you’ve digested everything we’ve said so far pretty easily, then let’s end the article with another curveball: Shorting.

Returning one final time to the example of FTT coin, if you felt the crypto was going to lose its value, you could short it—meaning you’d be effectively betting on its demise and would earn more money if your production was correct. This might seem counterintuitive if you’re unfamiliar with the concept, but it’s no more or less risky than stand leverage trading. 

If you think there’s a bear market coming, this is the way to go. But a quote from Warren Buffet is worth bearing in mind: “be fearful when others are greedy, and greedy when others are fearful.”

Don’t just short when you see the market is falling and margin trade when you see others buying in. Always think for yourself, and don’t go too crazy.

Buy with MyConstant loans

Crypto leverage trading certainly isn’t for the faint of heart—but then again, no form of trading is. Still, if you’re willing to experiment with forms of borrowing to expand your investing capacity, this is a great way to do it.

With p2p crypto lending platforms like MyConstant, all you need to do is collateralize your crypto to receive instant crypto-backed loans with low-interest rates, and buy any one of the 70+ cryptocurrencies we support.

If you don’t own any cryptos and planned to buy some, our MCT tokens might be a good choice. we’re giving you an opportunity to earn free MCT on the MyConstant Airdrop prize wheel by completing tasks. When you invest in our platform using MCT token, you will earn 20% more interest.

Other benefits include:

  • Cut the cost of borrowing: MCT token holders will enjoy a 20% reduction in borrowing fees on MyConstant.
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Joining our Telegram channel or just sign up to the platform to spin the Prize Wheel and earn MCT now.

And don’t forget, you can also lend your crypto to earn up to 12% APY.

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George Schooling

George Schooling

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