Bitcoin leverage trading allows you to open larger positions with virtual credit offered by your broker. Basically, you can trade ten to twenty times more on leverage than you could trade with your own money. However, leverage trading is a double-edge sword because it can amplify your profits as well as your losses.
Why leverage is popular for Bitcoin trading
Even the most hardened anti-Bitcoiners might be questioning whether it’s time to ‘check in’ to the cryptocurrency world after the latest Bitcoin bull run. There’s an enormous amount of money to be made trading Bitcoin and other cryptocurrencies, but just as much to lose if you don’t know what you’re doing.
For beginner Bitcoin traders, leverage is usually the only way to play the game. Leverage is actually a far more efficient way to use your trading capital. Basically, you put up less for more. It’s no more riskier trading Bitcoin with leverage than it is with cash. In fact, leverage can actually reduce risk which is why professional traders use leverage for every trade they make.
The risk comes in using margin for Bitcoin leverage trading. More about that later in this article.
Bitcoin leverage trading is not a ‘get-rich-quick’ scheme
Let’s put it out there loud and clear, cryptocurrency trading is not a get-rich-quick scheme. In fact, you are at risk of losing a lot of money trading Bitcoin and other digital coins on the cryptocurrency exchanges.
What trading cryptocurrencies does offer is a way to gain financial freedom from draconian banking and government domination over your hard-earned money. It’s your path to taking back control of your money and protecting your wealth.
The cryptocurrency market is largely driven by market sentiment which makes trading these digital coins highly speculative. The combination of leverage and margin makes trading any currency both hugely attractive and dangerous.
If you want to jump on the Bitcoin bandwagon, you need to know what leverage trading is and the risks involved. This article breaks Bitcoin leverage trading down in detail as well as trading on margin so you have all the information you need to know before getting into this high-risk activity.
What is Bitcoin leverage trading?
Basically, leverage is a form of virtual credit that retail brokers give to their trading clients which allows them to open large trades, larger than they would if their clients used their own capital. Basically, it’s more or less borrowing money from a retail forex broker to trade bigger deals.
To trade Bitcoin on leverage with money you don’t have, you can borrow the trading capital from your broker. This is known as margin trading.
Brokers offer leverage that ranges from 5:1 to 1 000:1. On average, you can control 10 to 20 times the amount required to open a position.
For $200 of your own money and leverage of 50:1, you can trade $10 000 worth of Bitcoin.
For $200 of your own money and leverage of 400:1, you can trade $80 000 worth of Bitcoin.
What is margin trading?
Margin is the amount of money your broker requires you to have in your margin account before the broker can open and hold a position for you. When trading Bitcoin on margin, you only need to pay a percentage of the full value of the position to open a trade.
The margin requirement is expressed in percentages. Most forex brokers require 2%, 1%, .5% or .25% margin.
If your broker offers 50:1 leverage and requires a 2% margin, you need to have 2% of the trade size in your account to open the position.
To open a position of $50 000 and the broker’s margin is 2%, you need to have at least $1 000 in your account.
To open a position of $100 000 and the broker’s margin is 2%, you need to have at least $2 000 in your account.
The amount of money that your broker holds in your margin account to keep your current positions open. The money is yours but you can’t touch it until your broker gives it back to you when you close a position or when you receive a margin call.
The amount of money available in your margin account to open new positions.
You get a margin call when the amount of money in your margin account is not enough to cover possible loss. This happens when your equity falls below your used margin. When a margin call occurs, some or all of your open positions are closed by your broker at the market price.
What is the difference between leverage and margin?
Leverage and margin both involve borrowing; however, they are two different financial strategies.
Leverage is a credit that brokers give traders so they can open larger trades. Margin is the amount of money traders must put down as a ‘deposit’ before a broker will open a position for them.
Trading Bitcoin on leverage allows you to control a large amount of money for Bitcoin trades using none or using a small amount of your own money and borrowing the rest. For example, with leverage of 50:1, you can control a $50 000 position with only $1 000 of your own money.
Trading Bitcoin on margin allows you to open positions without having to put the full value of the open position in the pot for trading. Traders can use a margin account to borrow money at a fixed interest rate to trade Bitcoin on leverage.
Pros and cons of trading Bitcoin on leverage and margin
Leverage has been around since our ancestors first started trading cows for gold. Leverage comes in different forms but basically, it’s a way of using debt to help achieve a financial or business goal.
Leverage can be created by trading on margin. With Bitcoin leverage trading, margin allows you to borrow money to trade larger positions with less of your own money. It amplifies your potential gains but also possible losses.
The bottom line, Bitcoin leverage trading allows you to make an investment in the digital currency that’s ten to twenty times greater than you would be able to with your own money. For beginner traders, it’s often the only realistic way to enter the Bitcoin trading market.
Leverage offers Bitcoin traders an effective tool to increase their returns by taking out larger positions. However, it comes with big risks. If a trader is overleveraged it means he or she has taken on too much debt, where the debt-to-equity or debt-to-total assets ratio is out of balance.
If you trade Bitcoin on margin and the digital coin performs badly, you still owe the margin debt (plus interest). You have to come up with the money or sell what you have in Bitcoin to pay back the money. If you trade Bitcoin on margin and the digital coin does well, it’s happy days.
The downside of trading Bitcoin on leverage and margin is it can cost you dearly if the market turns in the wrong direction. Beginner traders need to know that they don’t have to take the full leverage offered by brokers, only what is within reasonable risk.
If a broker offers leverage of 400:1, you shouldn’t take more than 5:1 or more than 50:1 to protect yourself from getting into serious financial trouble. Tempting as it may be, leave the leverage rates of 400:1 and even 1000:1 to the seasoned cryptocurrency trading professionals.
Let’s look at an example of trading with no leverage and leverage.
Capital in margin account
Price goes up 10%
Profit of $50
Profit of $500
Profit of $2 500
Price goes down 10%
Loss of $50
Loss of $500
Loss of $2 500
A higher leverage can give you higher returns if the price moves in your favour. However, a higher leverage can give you higher losses if the price moves in the wrong direction.
Beginner Bitcoin traders should always use a lower leverage; don’t be tempted to take a higher leverage because your account can be wiped out in a matter of seconds considering how volatile the Bitcoin price movements have been in recent years.
Unleveraged versus overleveraged trading
Underleveraged traders lose less of their capital investment than overleveraged traders. In fact, depending on the total amount of the margin account, an overleveraged trader can lose 100% of the margin requirement.
Value of Bitcoin transaction
Loss after a change of $100 in BTC value
% of capital lost
% of capital remaining
% of remaining capital needed to breakeven
Margin call: when things go bad
When the value of your Bitcoin trading account falls below a certain threshold, you’re going to get a call from the broker. This is the dreaded margin call.
A margin call means you have to either add more money in order to satisfy the leverage or forfeit your position. If you are not able to bring your margin account up to the minimum requirements, the broker has a right to sell off the positions. The broker will also add on any commissions or fees as well as interest on the outstanding margin amount.
As you can see, falling short on your ‘loan agreement’ with your cryptocurrency broker can spell financial disaster if you don’t have the means to ‘settle your account’. This is why it’s better to be underleveraged than overleveraged when trading Bitcoin CFDs.
Best leverage strategy for beginner Bitcoin traders
Beginner Bitcoin traders should err on the side of caution and only use 5:1 leverage for cryptocurrency trading. You can go as high as 10:1 for less volatile instruments.
Don’t be tempted by high leverage ratios
It isn’t compulsory for you to use the full leverage offered by your broker. You can trade with 5:1 leverage and still make a profit. Low leverage may not maximise your profits as high as the market hypes it up but it’s the safer option until you’re more of an expert in Bitcoin leverage trading.
Use fixed stops
Stops is the trading lingo for stop-loss orders. A stop-loss order is the price level you set that the broker must close out a losing position for you. Stops are a useful tool for Bitcoin leverage trading, except if slippage occurs. Then your stop-loss order may not be carried out at the price you specified.
Standard stop-loss orders are not always honoured because your broker can only close the trade at the best available price after reaching your stop. In an extremely volatile trading environment, the best available price could be hundreds of pips away from your standard stop loss.
Use guaranteed stops
Guaranteed stops ensure your broker closes your position at your designated stop loss. This means your position will not be affected by high volatility and weekend gaps. Guaranteed stops work in the same way as basic stop-loss orders but the difference is they will always be filled at the level you set, even if the prices move dramatically.
More importantly, a guaranteed stop removes the risk of slippage. This is when the price at which your order is executed does not match the price at which it was requested.
Is it safe to trade Bitcoin on leverage?
Leverage trading gets a bad rap because it’s associated with being very risky. In fact, the professionals see it exactly the opposite way. On a professional level, leverage is a very efficient use of trading capital because it allows you to trade larger positions with less trading capital.
Leverage does not alter the potential profit and loss that you can make on a position. All it does is reduce the amount of trading capital you must put up to open a position. If you have $20 000 available to trade but only need to put up $5 000 if you trade Bitcoin on leverage; it makes sense to use the balance of $15 000 to trade other financial assets.
Cautious leverage is not dangerous for beginner traders. Trading cryptocurrencies on margin is high risk. Basically, you are borrowing money you don’t have so you can trade larger positions on leverage. It’s all happy days if Bitcoin’s prices move in your favour but you’re in serious trouble if they don’t.
Trading cryptocurrencies is high risk because it’s a volatile financial asset driven almost exclusively by market sentiment. Throw in trading Bitcoin on margin and the risk is compounded.
Our recommendation to beginner Bitcoin trading is use leverage and margin with caution. Rather make small gains through a lower-risk strategy than chase the big gains and potentially lose your entire investment.
FOREX TRADING AFRICA DISCLAIMER
Trading cryptocurrencies carries a high level of risk and may not be suitable for all retail traders and investors. Consider your capacity for risk before deciding to trade cryptocurrencies. There is the possibility that you could lose some or all of your initial investment so you should not invest money that you cannot afford to lose.
The information in this article is for education purposes only. Forex Trading Africa will not accept liability for any financial loss which may arise directly or indirectly from use of or reliance on information contained in this article.