Bitcoin Leverage Trading: How to Earn More Profits with Lesser Capital
Margin Trading is a trading strategy executed by borrowing funds from a broker and trade more than your capital. Let’s say you have 3000 USD with which you can buy 0.1 BTC and you are sure the price would double in next 1 month. With spot trading, you can at max earn 3000 USD as profit if BTC doubles. What if you could borrow another 3000 USD from your friend at a very low interest for one month. And now you have 0.2 BTC. At the end of the month, BTC has doubled in price. Now you can sell 0.2BTC and get 12000 USD. You can now give your friend back 3000 USD and some interest.
Your net profit now is: 12000-3000-3000= 6000 USD.
Without the help from your friend, the profit would have been 3000 USD.
So you doubled your profit, with a little help from your friend.
The same concept is used in leverage trading.
Here, the system ensures that your friend gets automatically, and surely paid even if the trade does not go your way. So the system will liquidate your money if you are down by a little less than 50 percent.
What we are going to learn?
What is Leverage Trading and What is Margin?
In leverage trading, if you have 1000USD and would like to trade with a volume of 5000USD, then you need to trade from an account or site that allows 5X leverage trading. With 5X leverage trading, you would be able to trade with a volume of 5000USD with only 1000 USD capital.
The trader’s initial capital is known as the “margin” of the crypto trader. Margin is the maximum amount you can lose if the trade goes otherwise.
Gains and losses can be amplified by the leverage.
Bitcoin Trading with and without Leverage: Comparison
|Trading Bitcoin without Leverage||Trading Bitcoin with 5x Leverage|
|Capital for Trade (in USD)||1000||1000|
|Capital with Margin||1000||5000|
|Value at 2x Bitcoin||2000||10000|
|Loss at 10 percent loss||100||500|
|Portfolio at 10 percent loss||900||500|
|Portfolio at 20 percent loss||800||0|
Things to Know Before you Start Leverage Trading Bitcoin
Bitcoin is easily one of the most popular and traded crypto assets in the crypto space. It is a highly volatile digital asset when compared to other crypto. Thus, leverage trading with Bitcoin can result in drastic losses or profits. This trading strategy is suitable for intermediate and advanced crypto traders only as it requires a sufficient amount of knowledge and experience to execute margin trades.
BitMEX was the first crypto exchange and trading platform to offer Leverage Bitcoin Trading. The platform’s users could trade their perpetual futures for up to 100x leverage.
Importance of Risk Management for Leverage Trading Crypto
Risk Management is essential during margin trading. Some ideas and strategies involved in Leverage Bitcoin Trading:
- Bitcoin trading is unstable and extremely volatile to begin with. Keeping track of threats and trades executed will prove to be beneficial in the long run. It is always better to trade with a certain amount that your are willing to lose. Betting your entire capital funds might result in potentially, huge losses. I would advice to trade taking 10 percent of your entire capital as the maximum loss for one trade. This percentage may vary from person to person depending upon their risk taking capacity. But, never ever trade with all your capital. You may lose all your funds in no time. It would be a pure gamble if you trade with all your crypto without doing any risk management.
- Usage of stop loss is another method to manage you risks while executing leverage trading. With stop loss limits, the trader can set a danger or trigger level and after reaching that level, the trading position is closed. You are just inviting the system to make you huge losses.
- Guaranteed stops behave as conventional stops that aids the user to put a top to their trading position at any given point in time. Thus, regardless of the level of volatility of the crypto asset, the trader can force a stop and put an end to the trade.
How to Trade Bitcoin with Leverage?
Sign up with brokers or crypto exchanges that allow leverage trading with crypto. Some of the platforms’ names are mentioned below. Once you are signed up, and your account is set up, you are ready to start Bitcoin leverage trading.
A crypto trader can open two types of trading positions during trading:
- Long: This is when the crypto trader speculates and expects a rise in price.
- Short: This is also known as short sell, it is when the crypto trader speculates and expects a fall in price. This is a very important feature of margin trading that helps you earn profits even when the market is bearish.
If the market fluctuates in the favor of the crypto trader’s prediction, they make profit. They can fix their income or level of profit in proportion to the chosen leverage.
Bitcoin leverage trading platforms
Some of the top crypto platforms that support leverage trading for Bitcoin are:
Bybit: Bybit allows margin trading for the crypto coin, Bitcoin, Bitcoin derivatives and Bitcoin futures. The trading fees are charged on a maker and taker model, a charge of -0.025% and 0.075 is levied respectively.
Deribit: Deribit offers up to 100x leverage for trading Futures.
BitMEX: BitMEX allows leverage trading for Bitcoin, derivatives as well as futures. A minimum of $1 USD is required for leverage trading. The trading fees on BItMEX are charged on a maker and taker model, and is charged with -0.025% and 0.075 respectively.
Binance Futures: Binance Futures allows margin trading on Bitcoin Futures and serves a crypto spot market exchange as well. The trading fee is a minimum of 0.01% and varies on the type of altcoin chosen by the trader.
Kraken: Kraken offers up to 50x leverage. Users have to pass their level 2 KYC verification to access trading with Futures.
Bitfinex: Up to 100x leverage on Bitcoin and Ethereum is offered by Bitfinex.
CoinDCX: An Indian crypto exchange that allows you to margin trade Bitcoin and alts.
Huobi, Prime XBT, PrimeBit, FTX, CEX.io, eToro, Kucoin, Poloniex, OKcoin are other popular platforms that provide access to margin or leverage trading with Bitcoin.
What is the recommended Leverage Trading Ratio for Bitcoin?
For anyone who is just starting, I would recommend a leverage not for than 5X or a leverage ratio of 1:5. Anything above this would be financially dangerous for a new traders. Bitcoin itself is very volatile, anything above 5x is not recommended.
However, I have also seen traders with a good experience in leverage trading use 1:20 leverage ration, or 20x leverage, in some cases.
Pros of Leverage Trading Bitcoin or any other crypto
- Crypto traders can open larger trading positions with only a part of their capital through leverage trading. The funds do not remain idle on the crypto exchange, and in case of a hacking incident or a risk to their funds, the risk of losing the complete funds are reduced.
- A day trader can execute advantageous trades by opening larger trading positions on days with a potential for high profits. The probability of a successful trade by an experienced day trader is quite high.
- Marin or leverage trading can prove to be beneficial for scalpers who execute scalp trades in the crypto market because of the extreme levels of volatility.
- Crypto traders can make a profit if the price falls by shorting.
- The leverage or margin trader can hedge their trading position, with no need to sell their crypto coins if they short the trade. Hedging is a technique where a trader offsets one financial risk with another financial risk in the opposite direction.
Cons or Risks of Bitcoin Leverage Trading
- Leverage or margin trading magnifies your profits and losses, and in case of a loss, the trader bears a huge loss. This is not for new traders, and requires a lot of expertise.
- Usage of margin for trading is usually not free and affects the trader’s investment portfolio. Monitoring and controlling the leverage trade is essential in most cases.
Is Leverage and Margin Trading Same?
Margin trading uses the same principle used by leverage trading. Leverage trading is expressed in ratio. Margin trading is expressed in percentage. Leverage is the ratio of the total capital alloted to you for trading and the actual capital.
Should I do Bitcoin Leverage Trading?
I would advise you to do a thorough research on leverage trading before you start your Bitcoin leverage trading journey. Play with a small amount initially and see how much money you can make consistently for atleast 6 months. Once you are hands on with it, then you can consider doing leverage trading Bitcoin with a good capital.