In Indonesia, recently, crypto asset trading has been gaining popularity.
In digital trading assets, traders commonly use many methods, including leverage.
Usually, this one term will be heard in the world of trading crypto, forex, and the spot market.
So, to learn more about leverage and how to use it in crypto trading, see the following review.
What Is Leverage in Crypto Trading?
If taken literally, leverage is a loan that can be used to trade.
Using leverage can later increase the profit potential, although sometimes it is also overshadowed by the risk of loss.
Leverage is borrowing money to trade commodity assets, whether crypto, stocks, or forex.
With leverage, traders can borrow more money than their capital to achieve higher profits.
Usually, the amount of leverage a trader can get will appear in the form of a leverage ratio.
The ratio will also vary depending on the crypto exchange that provides leverage and the pair (trading pair).
The ratio will show the number of times the actual funds can increase.
Variations in leverage ratios that often appear are 1:5 (x 5), 1:10 (x 10), or 1:20 (x 20).
Please note that crypto leverage goes hand-in-hand with other crypto products, such as margin, crypto derivatives, token leverage, and futures.
Difference between Margin and Leverage
The concepts of margin and leverage look almost the same in crypto trading.
However, in reality, these two concepts are very different.
The first difference is that the margin is higher, while the leverage ratio is the opposite, which is lower.
The next difference is that margin is money invested as a down payment. In contrast, leverage is borrowed funds.
However, these two concepts can increase a trader’s purchasing power and profit potential.
That’s because the method allows traders to borrow money and trade higher amounts.
How Crypto Leverage Works
Typically, leverage is used to assist traders in trading. However, it is important to underline that the capital you spent to activate leverage cannot be withdrawn later.
The reason is that money will be collateral for the lender who has given you a loan for trading.
As an example of crypto leverage, suppose you only have IDR 5,000,000 in capital and want to buy an Ethereum (ETH) token for IDR 2,500,000 per token.
In this case, if you don’t use a leverage strategy, then you can only buy 2 ETH tokens.
However, if you use leverage, for example, 10x, you can buy 20 ETH tokens with a capital of IDR 5,000,000.
This can happen because your capital will change ten times, IDR 50,000,000.
Furthermore, you will also get a significant profit when the ETH price rises to IDR 3,000,000 per token.
Your ETH value becomes IDR 60,000,000, so you profit from IDR 10,000,000.
Advantages and Disadvantages of Using Leverage
So, what are the advantages and disadvantages of using leverage in trading?
The main advantage is that the bigger the money, the bigger the profit.
Then, leverage will be beneficial if you add liquidity to your trading account.
With a minimal deposit and x4 leverage, for example, traders will be more flexible than using x2 leverage only on one crypto exchange.
You can later use the remaining capital to arrange other needs, for example, staking or investing in crypto elsewhere.
On the other hand, the downside of leverage is that this strategy can result in sizable losses.
This happens because your losses will later be multiplied by the leverage you took before.
The Risks of Using Leverage
Even though leverage can be a strategy that can increase profit in investing, this method also has a high potential for loss.
The reason is that the higher your leverage, the smaller the margin used.
Thus, there will be less guaranteed lowest paid per transaction.
Sometimes, even a price difference of only 1% can be significant for liquidation, so that traders will experience high cash losses.
As is known, crypto is such a volatile market that the risks are enormous.
This often brings losses to traders new to the crypto world who need help understanding its intricacies.
In this case, traders can use several risk management strategies to help them minimize their risk when using leverage strategies, including stopping loss.
In addition, several trading platforms also offer a risk management strategy called “negative balance protection.”
This strategy will stop traders from losing more money.
The lending platform will also agree to bear some losses if a trader’s equity goes negative due to leverage.
Crypto Trading Strategy Using Leverage
There are many crypto trading strategies that you can try using leverage.
Anything? Here’s a full explanation:
1. Uptrend market conditions
Traders are strongly advised to leverage when he believes that the crypto asset’s price will go into an uptrend phase.
Of course, these conditions can be considered by understanding technical analysis.
The characteristics of an uptrend, including the trendline, pay attention to the shape of the peaks and valleys.
Signs of an uptrend, namely when asset prices form a pattern of increasingly high peaks here, at least two consecutive peaks, and two valleys in a period.
The signs of an uptrend are two higher highs (peak points) and two higher lows (trough points), which are higher than before.
That means the trend of market prices continues to rise successively. Even if there is a drop, this drop point is not lower than the previous point.
2. Stop losses
The trader must also determine the stop loss point after he understands market conditions.
The purpose of this is to limit potential losses. Stop loss is a limit to limit the losses that traders will accept.
Setting a stop loss means that when the price moves not in line with the trader’s expectations then touches that limit, and the order will automatically stop.
Then, the trader will also receive a loss according to that limit. Even though not many traders like stop losses, this method is very useful when setting crypto leverage so that the risk of loss is not getting higher.
3. Take profits
In contrast to the stop loss earlier, take profit is a limit to the profit the trader wants.
The order will automatically stop when the price reaches the take profit limit.
That way, the trader will make a profit according to that limit.
Even though many traders don’t like to limit their profits taking profit is useful for securing profits.
Moreover, when using leverage in digital asset trading, the take-profit limit will be useful to prevent greed and make the risk even bigger.
Please note these limits must be based on previous analysis to maximize profits.
Things to Look For When Leverage Trading Crypto Assets
When leveraged trading crypto assets, several things need to be considered, including:
1. Conduct in-depth research before investing
The first thing to pay attention to is to ensure you have done in-depth research before investing.
This will be the best way for traders/investors to assess the performance of the crypto invested.
As for in-depth research that you can do, including learning to understand the market, analyzing charts, and reading the daily news.
2. Determine the leverage ratio used
The next important thing to note is that you must ensure the ratio/return is the right one.
Let’s say the price of Bitcoin (BTC), when trading was opened, was $56,500.
Then, the price rose by 4% to $ 58,700 US dollars.
However, it declined 4% below its opening price of $54,000.
Well, the leverage ratio value (1:10) will represent the amount of profit or loss of $ 200.
Leverage is a loan that can be used to trade.
Using leverage can increase the profit potential, although sometimes it is also overshadowed by the risk of loss.
Leverage can be interpreted as borrowing money to transact commodity assets, crypto assets, stocks, and forex.
The advantage that can be obtained from leverage, among other things, is that the greater the amount of money, the greater the profit.
Besides that, leverage will also be beneficial if a trader adds liquidity to his trading account.
Meanwhile, the most basic weakness of leverage is that this strategy can cause large losses.
The reason is that the trader’s losses will later be multiplied by the leverage he previously took.
How do you understand leverage in the crypto world?
Now is the time to ensure you are trading on a trusted platform like INDODAX.
However, before trading, you should check today’s crypto prices on the INDODAX Market page.
Come on, trade right now!