Leverage trading or Margin trading is the act of borrowing additional money or cryptocurrency by leveraging on the amount you already own to buy more. It is a strategy where the trader uses borrowed funds from a broker to trade in financial assets which become collateral for the borrowed funds. It is conducted only through specialized accounts that allow investors to short sell assets. Leverage trading is only possible when there are lenders who provide leverage for traders to trade or invest in larger amounts.
This service which has been in use in the traditional financial market has been incorporated into crypto-trading. The difference is that the exchange becomes the broker in the traditional set-up who provides the leverage. BitMex (Bitcoin Mercantile Exchange) is one of such platforms designed for advanced currency trading. Deribit is another option as it is a fast, technically advanced platform that is designed to trade in European style cash.
In order to fully explain how leverage trading works in the cryptocurrency world, we will use an illustration. For example, let’s say you plan on making an investment of $200 in Bitcoin (BTC) but you have only $100.With average trading, you can borrow that extra amount through a margin of 2:1. This means that for every dollar you have, you get an extra dollar to invest.
However, there is a caveat. Leverage trading is not for the inexperienced trader because of the risks involved. When not handled expertly, you could be the worse for it. Take the example above. An increase in BTC prices means that you can recoup your investment. Conversely, if the prices of BTC plummet, the lender has the first right to the equivalent of their BTC in your possession. In that case, you lose.
In order to engage in leverage trading, you need a high level of proficiency in crypto trading and a bit of luck.