What is Crypto Leverage Trading?

Crypto leveraged trading is a popular product and crypto trading instrument.

All the top Bitcoin and altcoin exchanges offer crypto leveraged trading as a part of their products.

Crypto leverage trading can be tempting for potentially quick profits. However, there are a lot of hidden risks for new traders that you should be aware of before starting trading crypto leverage.

Different Crypto Leverage Trading

There are a few different crypto leverage trading products

  • Margin Trading (Not Derivative)
  • Leveraged Tokens
  • Futures and Perpetuals
  • Options

Margin trading is spot trading with leverage. Therefore, margin trading allows leverage trading but is not derivative trading. Read more about the best crypto margin trading exchanges,

Leveraged tokens are financial products that track an underlying asset’s price movements. The tracking is done using derivative instruments to multiply your earnings. Read more about the best leveraged token crypto trading sites,

Futures and perpetuals are contracts to, buy or sell, the underlying asset for a specific price in the future.

  • Futures are settled on a predetermined specific date
  • Perpetuals are “open-ended” futures with no specific settlement day.

Both are available with high leverage and are often denominated in USDT but there are USDC and BUSD denominated contracts as well.

Crypto options are contracts between buyers and sellers. Here, you pay a premium to have the option to buy or sell the underlying asset for a specific price at a particular date in the future. Read more about the best crypto option trading sites,

What is Crypto Leverage Trading?

With crypto leverage trading, you bicycle upwards and bicycle downwards compared to spot trading when you walk in both directions.

Crypto leverage trading allows you to open a crypto trading position using a small amount of capital to take a much more significant role in the market.

Derivative leverage trading means you don’t trade the actual underlying asset in the spot market but a product deriving its price from the underlying asset.

Can you give an example of leverage trading in everyday life?

House loan picture for leverage trading in everyday life

Most people use leverage trading when they buy a house or an apartment.

They put a small amount in their savings account and lend the rest to the bank. The bank allows this because they receive interest payments every month from you by providing this service.

What does it mean I don’t own the underlying asset?

When you buy Bitcoin on the spot market, you get real Bitcoin. However, if you go long Bitcoin on the perpetual market, you sign a contract to buy Bitcoin for a certain price at some point in the future.

Do I have do loan funds to trade with leverage?

Yes and no. For perpetual and futures you have to borrow funds. For leveraged tokens, you technically borrow funds but it’s included in the fee model. Leveraged tokens are a simplified version for leveraged trading. For options trading you don´t have to borrow funds since you only pay a small upfront premium for the option to buy or sell an asset.

Crypto Leverage Trading Long VS Short

Long VS Short or Bull VS Bear in front of a red and green trading chart

Crypto leverage trading allows you to go long and short in the market.

  • Going long in the market means you will profit from a bull market.
  • going short in a market means you will profit from a bear market.

Crypto Leverage Trading Risks

Exclamation sign for risks associated with shorting Bitcoin on Binance

There are probably not enough words to tell you about the risks associated with crypto leverage trading. Most people have to experience this to understand how quickly you can get liquidated in volatile markets like cryptocurrencies.

Still, you must understand the terms and concepts before using leverage.

Certain events can be triggered during a leveraged trade.

  • Margin Level
  • Margin Call
  • Liquidation
  • insurance funds

What is crypto margin level?

Crypto margin level is a measurement to keep track of your funds to make sure you don´t end up in a negative balance.

There are two main different margin levels

  • Cross margin level = Total Asset Value of the Cross Margin Account / (Total Liabilities + Outstanding Interest)
  • Isolated margin level = Total Value of Assets in the Isolated Margin Account / (Total Liabilities + Unpaid Interest)

What is a crypto margin call?

The crypto trading exchange sends a margin call if the margin level decreases too much.

A margin call is the first step to warn the trader that the position may end up liquidating.

Crypto Leverage Trading Liquidation

If your margin level falls under the liquidation trigger level, your position will be closed on the market.

Now, the loan will be paid back first, and a certain liquidation fee will often be charged.

After this, if any funds remain, you will get them into your account.

Crypto Leveraged Trading Insurance Funds

Some exchanges have insurance funds to be able to pay if a liquidation doesn’t manage to close the position over the liquidation price.

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