This article will provide an in-depth explanation of what trading with leverage entails. It will explain the advantages of using this method and the top crypto trading platforms that provide leverage trading.
What does it mean?
Before we get into trading, let’s first break down what ‘leverage’ means. Leverage comes from using borrowed capital as a source of funding. Specifically, when investing in order to expand the firm’s asset base and produce returns on risk capital.
Leverage is essentially a strategy of investment that uses borrowed money as a means to increase an investment’s potential return. To elaborate on the money, it’s specifically the use of various financial instruments or borrowed capital. Leverage is also indicative of the amount of debt a firm utilizes as a way to finance assets. When a company, property, or investment is “highly leveraged,” it means that the item possesses more debt than equity.
Overall, leverage is the application of debt in order to commence an investment or project. The outcome is to multiply the potential returns from a project. On top of that, leverage will also multiply the potential risk should the investment not successfully pan out.
Both investors and companies employ the concept of leverage. Investors use leverage to greatly increase the returns that investments can provide. They leverage their investments by utilizing an array of instruments, including options, futures, and margin accounts. Companies use leverage as a way to finance their assets. Basically, rather than issuing stock to raise capital, companies instead use debt financing to invest in business operations. All this is in an attempt to boost shareholder value.
Investors who are not exactly comfortable with directly using leverage have plenty of ways to access leverage indirectly. They are able to invest in companies that employ leverage in the normal course of their business to finance or expand operations. This is possible without ever-increasing their expenses.
Investopedia editor, Adam Heyes, explains an example of leverage:
“A company formed with an investment of $5 million from investors, the equity in the company is $5 million; this is the money the company can use to operate. If the company uses debt financing by borrowing $20 million, it now has $25 million to invest in business operations and more opportunity to increase value for shareholders. An automaker, for example, could borrow money to build a new factory. The new factory would enable the automaker to increase the number of cars it produces and increase profits.”
Margin: what’s the difference?
Despite the two sharing a connection (i.e. they involve borrowing), ‘leverage’ and ‘margin’ are not the same. Leverage refers to taking on debt, whereas margin is debt or money that a firm borrows to invest in other financial instruments. A margin account gives you the ability to borrow money from a broker for a fixed interest rate. This allows you to purchase securities, options, or futures contracts in anticipation of obtaining considerably high returns.
To go more into detail, the margin is the money a brokerage firm borrows so that they can buy an investment. It is the key difference between the two things:
- The total value of securities that an investor’s account holds
- The loan amount from the broker
‘Buying on margin’ is the act of borrowing money in order to purchase securities. This procedure includes buying an asset where the buyer pays only a portion of the asset’s value. Moreover, they borrow the remainder from the bank or broker. The broker serves as a lender and the securities within the investor’s account act as collateral.
With all this in mind, it is actually possible to use margin to create leverage.
A tool for trade
Leverage trading is a system in which the trader can open positions that are substantially larger than their own capital. The trader only has to invest a certain percentage of the position, which is affected by a number of factors. Not only that, but it also changes between instruments, brokers, and platforms.
Leverage trading is a popular idea amongst traders and brokers alike and it is a fairly common trading tool. ‘Leverage’ is usually a reference to the ratio between the position value and the investment that is needed. ‘Required Margin’ is the percentage of the position that the trader needs to open it.
Trading with leverage is ultimately trading on credit, by way of depositing a small amount of cash. Following this, there is borrowing a more sizable cash amount. For instance, a trade on the EUR futures market consists of a contract value of $125,000. In other words, the minimum amount that someone can trade is $125,000. However, by utilizing leverage, that same trade can be made with only (roughly) $6,000 in cash.
Trading leverage provides users with a variety of advantages. So much so that this is what led to it being a recurring tool in the trading world.
- It minimizes the capital that the trader needs in order to invest. Instead of paying an instrument’s full price, the trader can pay only a small portion of it. For example, let’s assume that a position’s value during the opening is $3,000. Rather than paying the full amount, the individual can apply the leverage of 20:1. This means that for every $20 in actual value, they will have to invest $1 of their own capital. In essence, for this position, the individual will need $150 if they want to open it.
- A good chunk of the instruments is pretty cheap. This is good news for many traders, as they can trade them easily. However, some are some that are comparatively more prestigious. By drawing from their traded frequency and other factors, those ones are much more expensive. In lieu of investing large amounts to take part in their market, one can employ leverage and enjoy the change in those instruments’ prices.
- Leverage trading – alternatively ‘margin trading’ – requires less capital, which is a major advantage for a majority of traders. However, along with that advantage comes a risk of loss. One is able to gain more than their initial investment, but losses can occur on a similar scale. It is very important that you keep track of the opened position. Moreover, you should apply to stop-loss and other market orders if you want to prevent any large-scale losses.
Leverage, in the context of foreign exchange (forex) trading, means you can have a small amount of capital in your account. All while you control a larger amount within the market.
Stock traders will typically refer to this as ‘trading on margin’. In forex trading, there is no charge of interest on the margin you are using. Furthermore, it doesn’t matter what kind of trader you are, nor what kind of credit you have. If you possess an account and the broker offers you margin, then you are able to trade on it.
The obvious advantage of using leverage, in this case, is that you can potentially make an abundance of money. What’s more, you can make this money with only a certain amount of capital. The primary drawback is that you can also potentially lose a considerable amount of money when trading with leverage. In the end, it mostly depends on how you use it and also how careful your risk management is.
The leading platforms
Trading crypto with leverage is a lucrative technique, however, a majority of crypto trading platforms don’t offer it. While it is customary practice in traditional fiat and forex markets, it is typically seen as a risky move. This is especially true if you apply it to the erratic nature of cryptocurrency markets. For this reason, it is not something that many platforms provide.
It’s apparent that leverage does, in fact, intensify risk. Moreover, crypto-assets are considerably more volatile than both equity and forex markets. Regardless of this, crypto traders are open to the idea of accessing this advanced trading strategy. By doing so, they receive the exact same opportunity to boost the potential of their profit.
With this risk in mind, crypto’s erratic behavior can actually be advantageous to traders with experience and extensive knowledge. It can provide greater profits within a much shorter time frame, with only a portion of the funds invested.
Below are some of the leading crypto trading platforms that offer leverage on the market.
1 – Prime XBT
This platform offers up to 100x leverage on any and all available assets. This includes Bitcoin (BTC), Ethereum (ETH), EOS, Ripple (XRP), and Litecoin (LTC). It consists of both long and short positions.
Prime XBT provides traders with assembled liquidity in order to deliver the best price from 12 different leading liquidity providers. This delivery is able to be done in real-time and with instantaneous order execution. It accepts BTC, USD, EUR, as well as a wide variety of cryptos that Changelly supports. On top of that, there are no deposit fees. Additional features include advanced order types (ex. stop-loss), their lowest fee is only 0.05%, and no KYC requirements.
According to their website:
“PrimeXBT offers a robust trading system for both beginners and professional traders that demand highly reliable market data and performance. Entire infrastructure is designed to facilitate high number of orders per second and extreme loads, while offering ultra-fast order execution and low latency.”
2 – BitMEX
This platform offers up to 100x leverage on XBT (BTC), ETH 50x, LTC 33.3x, ADA 20x, BCH 20x, and XRP 20x. All of these can be traded against Bitcoin. It consists of both long and short positions and has incredibly high Bitcoin liquidity
BitMEX deals solely with BTC, no fiat or other cryptos, and absolutely no deposit fee. It includes advanced order types, including stop-loss, and considerably low fees of only 0.075% XBT. Moreover, 0.25% on all other assets and no KYC.
According to their website:
“BitMEX is a Peer-to-Peer Trading Platform that offers leveraged contracts that are bought and sold in Bitcoin. BitMEX only handles Bitcoin. All profit and loss is in Bitcoin, even if you’re buying and selling altcoin contracts. BitMEX does not handle fiat currency. BitMEX allows trading with a high amount of leverage.”
3 – OkEX
This platform offers up to 5x leverage on BTC, ETH, EOS, Ethereum Classic (ETC), and LTC. Moreover, it offers up to 3x on DASH, QTUM, Bitcoin SV (BSV), and NEO. It consists of both long and short positions and accepts deposits in BTC, LTC, ETH, ETC, and Tether (USDT). The deposit fees vary.
It includes advanced order types, including stop-loss and incredibly high liquidity. The fees range between 0.015% and 0.075%. There is a KYC requirement for withdrawing funds.
According to their website:
“A trusted platform with intuitive user interface allowing professionals to trade tokens with fiat currency conveniently. Trade over a hundred types of tokens including Bitcoin, Ethereum & Litecoin with leverage options. Arbitrage and hedge your risks with the convenient leverage option. Never-expiring contract with up to 100x leverage and an advanced risk management system.”
4 – Kraken
This platform offers up to 5x leverage on BTC, ETH, and XRP. It consists of both long and short positions.
It accepts deposits in USD, EUR, CAD, JPY, and BTC. In addition, it has a deposit fee of up to $5 USD. The liquidity is of a fair amount, though it is considerably higher for EUR and JPY. It includes advanced order types, including stop-loss and the fees range between 0 and 0.26%. The additional margin fee ranges from 0.01% to 0.02%. There is a requirement of KYC and AML (Anti-Money Laundering) verifications.
According to their website:
“From day one, we designed and built a streamlined bitcoin exchange for newcomers and experts alike. Make easy deposits and withdrawals, measure your portfolio’s performance and keep track of all of your digital assets in one convenient place.”
5 – Bitfinex
This platform offers up to 3.3x leverage on a select few major assets. It consists of both long and short positions and accepts BTC, major altcoins, and fiat. The fees of deposit vary.
It includes advanced order types, including stop-loss and has considerably high liquidity. The fees include 0.1% maker and 0.2% taker. There is a requirement for long KYC procedures and it takes up to 6-8 weeks for account verification.
According to their website:
“Bitfinex is a full-featured spot trading platform for major digital assets & cryptocurrencies, including Bitcoin, Ethereum, EOS, Litecoin, Ripple, NEO, Monero and many more. Bitfinex offers leveraged margin trading through a peer-to-peer funding market, allowing users to securely trade with up to 3.3x leverage. We also boast a suite of order types to help traders take advantage of every situation.”
6 – Poloniex
This platform offers up to 2.5x leverage on an array of cryptocurrencies. These include BTC, LTC, XRP, Monero (XMR), ETH, Staker (STR), DASH, Dogecoin (DOGE), Clams (CLAM), BTS, and Factom (FCT).
It consists of both long and short positions and it deposits in both BTC and altcoins, but no fiat. It includes advanced order types, including stop-loss and provides a fair level of liquidity. The fees include 0.1% maker and 0.2% taker. There is a requirement for KYC, AML, and CTF verifications.
According to their website:
“We have insurance coverage for the crypto assets on our platform. We’re deeply committed to security and store a significant portion of customer funds offline. To protect our customers, we work with regulators and industry peers to set standards and best practices.”
Trading using leverage is a highly efficient tool for trading capital. However, the risks that come with leverage trading are no different than the risks that come with trading with cash. Because of this, professional traders will use leverage for almost every trade that they conduct.
The bottom line is that trading with leverage is unpredictable and a lot is put on the line. Therefore, it is wise that you never invest more than you are able to afford to lose.