EXPLAINER: What is Bitcoin leverage trading?
Trading with leverage, also known as margin trading, can be a powerful way to engage the crypto market, as it offers a very specific set of advantages.
What are the advantages of trading with leverage?
First, even if you don’t have much capital to enter the market with, on AAX you can trade with up to 100x more capital than you actually put in.
Second, depending on your view on the market, you can go ‘long’, or ‘short’. If you go long, it means you expect the price of the contracts to go up; if you go short, it means you expect the price to go down. In both cases, depending on whether or not you’ve anticipated price movements correctly, you can make a profit, and with leverage, you can maximize the yield.
Third, futures contracts can act as a hedge against your investments on the spot market — say, if you hold Bitcoin (BTC) and the price is on a downward trend, by going short you can balance out your losses.
Finally, by trading with leverage you can make substantial gains, even from minimal price movements.
Example
Say you want to trade into 10 BTC at a price of $10,000 per BTC. To open such a trade on the spot market, or in a conventional trade setting, you would need to put in $100,000 (not taking into account commission fees). If the price of BTC goes up by 5%, you could sell your assets for $105,000, and thus make a $5,000 profit, based on a $100,000 investment.
If you enter the futures market with 100x leverage, this means that you would only need to invest $1,000 to take on a x100 = $100,000 position. Now, when you exit the market after the price has risen by 5%, you would have likewise made $5,000 profit, but then based on a mere $1,000 investment.
But what about losses?
Considering the example above, it would be logical to wonder if this means that your losses would likewise be multiplied when trading with leverage. However, such is not the case.
Futures trading on AAX, although somewhat resembling margin trading on forex markets, is different from trading forex with leverage in some important ways; the most crucial difference being that when you’re trading on AAX’s futures market, you can never lose more than what you’ve put in.
In other words, even if you trade with leverage, losses will not cut into your balance. So if you’ve put $1,000 into the futures market — even if you hold additional capital in your account — you cannot lose more than $1,000.
In fact, AAX will help you liquidate your position automatically, slightly before you hit your point of maximum loss. You can read more about this process in AAX’s Futures Trading Beginner’s Guide.
What is important to realize, however, is that when you trade with maximum leverage (x100), you have a higher chance of losing your margin, than, say, if you were to trade with x50, x25, or x2 leverage.
So, before you make a decision about the amount of leverage you want to trade with, you need to study the market well, take stock of technical indicators that may help you come to a view on the market, and gauge your risk appetite.
Besides BTC/USD, on AAX it’s also possible to trade ETH/USD, EOS/BTC, LTC/BTC, and XRP/BTC futures contracts.
Originally published at https://academy.aax.com on August 21, 2019.
