Summary

In cryptocurrency trading, leverage refers to the use of borrowed capital to place trades. Leverage trading can amplify your buying or selling power, allowing you to trade with larger amounts. Therefore, even if your initial capital is small, you can use it as collateral to make leveraged trades. While leveraged trading can double your potential profits, it is also subject to high risks, especially in the volatile cryptocurrency market. Be careful when using leverage to trade digital currencies. It may lead to significant losses if the market moves in the opposite direction to your trades.

the introduction

Trading with leverage can be confusing, especially for beginners. But before trying leverage, it is necessary to understand what it is and how it works. This article will focus on leveraged trading in the cryptocurrency markets, but much of the information also applies to traditional markets.

What is leverage in cryptocurrency trading?

Leverage refers to the use of borrowed capital to trade cryptocurrencies or other financial assets. It amplifies your buying or selling power so that you can trade with more capital than you currently have in your portfolio. You can borrow up to 100 times your account balance, depending on the cryptocurrency trading platform you are trading on.

The amount of leverage is indicated as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x). This shows how many times your initial capital is doubled. For example, imagine you have $100 in your trading platform account but you want to open a $1,000 trade in Bitcoin (BTC). With 10x leverage, $100 will have the same purchasing power as $1,000.

You can use leverage to trade various digital currency derivatives. Common types of leveraged trading include leveraged trading, leveraged tokens, and futures.

How does leveraged trading work?

Before you can borrow money and start trading with leverage, you need to deposit funds into your trading account. The initial capital you will provide is what we call “collateral”. The collateral required depends on the leverage you use and the total value of the position you want to open (known as leverage trading).

Let's say you want to invest $1,000 in Ethereum (ETH) with 10x leverage. The required borrowing trade will be 1/10 of $1000, which means you must have $100 in your account as collateral for the borrowed funds. If you use 20x leverage, the leverage trade required will be less than that (1/20 of $1,000 = $50). But keep in mind that the higher the leverage, the higher the liquidation risk.

Aside from the initial leveraged deposit, you will also need to maintain a leveraged limit for your trades. When the market moves against the direction of your trade, and the margin falls below the maintained limit, you will need to put more funds into your account to avoid liquidation. The limit is also known as the margin of coverage.

Leverage can be applied to both buy and sell trades. Opening a buy position means that you expect the price of the asset to rise. In contrast, opening a sell position means that you believe the price of the asset will fall. While this may seem like normal spot trading, using leverage allows you to buy or sell assets based solely on your collateral and not your balances. So, even if you don't have any assets, you can still borrow and sell (open a sell position) if you think the market will fall.

Example of a leveraged buy trade

Imagine you want to open a buy position worth $10,000 worth of Bitcoin with 10x leverage. This means that you will use $1,000 as collateral. If the price of BTC rises by 20%, you will make a net profit of $2,000 (minus fees), which is much higher than the $200 you would have made if you traded your capital of $1,000 without using leverage.

However, if the price of BTC drops by 20%, the value of your trade will decrease by $2,000. Since your initial capital (escrow) is only $1,000, a 20% drop could cause liquidation (your balance becomes zero). In fact, your account can be liquidated even if the market drops by just 10%. The exact liquidation value will depend on the trading platform you are using.

To avoid liquidation, you need to add more funds to your portfolio to increase your collateral. In most cases, the trading platform will send you a borrowing trade request before liquidation occurs (for example, an email telling you that more funds must be added).

Example of a leveraged sell trade

Now, imagine you want to open a sell trade worth $10,000 of BTC with 10x leverage. In this case, you would borrow BTC from someone else and sell them at the current market price. Your collateral will be $1,000, but since you are trading with 10x leverage, you can sell $10,000 worth of Bitcoin.

Assuming the current BTC price is $40,000, you borrow 0.25 BTC and sell it. If the price of BTC drops by 20% (to $32,000), you can buy back 0.25 BTC for just $8,000. This will give you a net profit of $2,000 (minus fees).

However, if BTC rises 20% to $48,000, you will need an additional $2,000 to buy back 0.25 BTC. Your trade will be liquidated because your account balance does not exceed $1,000. Again, to avoid liquidation, you need to add more funds to your portfolio to increase the collateral before reaching the liquidation price.

Why use leverage to trade cryptocurrencies?

As mentioned, traders use leverage to increase their trade size and potential profits. But as shown in the examples above, leveraged trading can also result in much higher losses.

Another reason traders use leverage is to enhance the liquidity of their capital. For example, instead of holding a 2x leveraged position on one trading platform, they can use 4x leverage to maintain the same position size with less collateral. This will allow them to use the other part of their funds elsewhere (for example, trading another asset, storing or providing liquidity to decentralized exchanges (DEX), investing in non-fungible tokens, etc.).

How to manage the risks of leveraged trading?

High leverage trading may require less capital to start with, but increases the chances of liquidation. If your leverage is too high, a price move of even 1% could result in huge losses. The higher the leverage, the less volatility is likely to occur. Using low leverage gives you a greater margin of error in trading. This is why Binance and other cryptocurrency trading platforms limit the maximum leverage available to new users.

Risk management strategies such as stop loss orders and take profit orders help reduce losses in leveraged trading. You can use stop loss orders to automatically close your trade at a certain price, which is very useful when the market is moving in the opposite direction to your trade. Stop loss orders can protect you from significant losses. Take profit orders are the opposite; It can be used to automatically close your deal when your profits reach a certain value. This allows you to secure your profits before the market situation changes.

At this point, it should be clear to you that trading with leverage is a double-edged sword that can greatly multiply your gains and losses. It involves a high level of risk, especially in the volatile digital currency market. At Binance, we encourage you to trade responsibly by taking accountability for your actions. We offer tools such as anti-addiction notification and cool-down function to help you take control of your trading. You should always be very careful, and do not forget to do your own research to understand how to use leverage correctly and plan your trading strategies.

How to use leveraged trading on Binance?

You can use leverage to trade cryptocurrencies on cryptocurrency trading platforms such as Binance. We'll show you how to start leverage trading, but the concept of leverage can also be found in other types of trading. Before we get started, you'll need a borrowing trading account. Follow our FAQ article to open a loan trading account if you haven't already.

1. Go to [Trading] - [Port Trading] from the top navigation bar.

2. Click [BTC/USDT] to search for the pair you want to use for trading. We will use the BNB/USDT trading pair.

3. You will also need to transfer funds to your borrowed trading wallet. Click [Transfer Collateral] below the price action chart.

4. Select the wallet you want to transfer funds to, the destination borrowing trading account, and the currency to transfer. Enter the amount, then click [Confirm]. In this example, we transfer 100 USDT to a mutual borrowing trading account.

5. Now, go to the box on the right. Select either [3x Reciprocated] or [10x Isolated]. In cross-trading mode, borrowing is shared between your borrowing accounts, while in isolated mode, borrowing is independent for each trading pair. You can read more about the difference between the two in our FAQ article.

6. Select [Buy] (buy trade) or [Sell] (sell trade) and the order type, such as Market Order. Click [Borrow], and you'll notice that the 100 USDT we transferred to the Borrow Trading Account has now tripled to 300 USDT.

7. You can buy BNB with leverage by entering the amount of USDT as [Total], or the amount of BNB to buy as [Quantity]. You can also drag the bar below to select the percentage of balance available for use. You will then see the amount you have borrowed for this trade. Click [Buy BNB for Scalp Trading] to open the trade.

Note that you will not be able to use your entire available balance as you will have to pay a trading fee. The system will automatically reserve the trading fee amount based on your VIP level.

Concluding thoughts

Leverage allows you to get started easily with a lower initial investment and the possibility of achieving higher profits. However, leverage combined with market volatility may cause liquidations to occur quickly, especially if you use 100x leverage to trade. Always trade with caution, and evaluate risks before entering into a leveraged trade. You should never trade money that you cannot afford to lose, especially when using leverage.