Cryptocurrency trading has become increasingly popular in recent years, with more and more people looking to get involved in the market. Leveraged trading is favored by many traders, both new and experienced, who can tolerate high-risk and high-return payouts.
What is leveraged trading? Put simply, leveraged trading allows users to trade with borrowed money, enabling them to have larger profit and loss exposure than they would have had if they did not use leverage.
In this blog post, we will cover what leveraged trading is, as well as give you pointers on where to get started.
What is Leveraged Trading?
Leveraged trading is a type of trading that allows users to trade with borrowed money. Under the umbrella of leveraged trading is margin and futures trading. Margin trading involves directly entering into positions in the spot trading market while futures trading involves entering into contracts in the derivatives market, and no underlying assets are actually being traded in the futures market. Both methods allow traders to expand their trading exposure with the use of leverage.
How does Leverage Work?
To gain access to leverage, users would have to deposit collateral first and choose the desired leverage they intend to use with their trade positions, subject to an individual user’s limits. The amount of leverage that a user can get will vary depending on the platform used. For example, having 10x leverage means if $1,000 worth of crypto assets were deposited as collateral, users can have access to up to $10,000 worth of trading assets.
It is important to note that while leverage allows traders the opportunity to score higher trading returns, it also exposes traders to potential losses of equal magnitude.
Assume that you use $1,000 of collateral to open a long ETH position of $10,000 at a 10x leverage. If ETH price increases by 20%, you will gain $2,000 before fees. This is double the amount of collateral value you have deposited, which implies that you made $2,000 using $1,000 (200% return).
However, if the price of ETH fell by 20%, your losses in that position would have been amplified to $2,000. This puts you at risk of liquidation because your losses are 2x of what your collateral is, subject to the liquidation value the exchange imposes. To avoid being liquidated, additional collateral would need to be deposited.
Leveraged trading allows users to make bigger trades than they would be able to if they were limited to only their initial capital. It amplifies their buying and selling power, which is especially useful for users with limited amounts of initial capital or those looking to make higher returns. Users are then able to capitalize on market opportunities on a larger scale. Do keep in mind that leveraged trading also comes with increased risk because your losses could be amplified as well as your returns.
Where to Get Started?
Many users start off their trading journey on centralized exchanges such as Binance, FTX, or OKX. These platforms offer order book leveraged trading, but users face centralization risks, custodial conflicts, and flash liquidations.
In contrast, on-chain DeFi leveraged trading offers users full transparency across trade execution, liquidations and asset holdings.
As the first on-chain, cross-margin platform on Ethereum, LeverFi offers DeFi users a best-in-class leveraged trading platform, with a suite of user benefits that include but are not limited to:
- Earn and trade: traders generate yields on their collateral used for trading.
- Unified collateral: traders can pool multiple types of collateral to unlock more leverage and trade in larger sizes.
- Flash crash resistance: asset pricings use open-source Chainlink oracles and are more flash crash resistant during liquidations.
Leveraged trading exposes traders to opportunities and gives them the tools they need to capitalize on them. With the right platform and approach, users can maximize their asset efficiency, especially during the challenging economic conditions we currently experience.
Although LeverFi’s platform is beginner friendly and has an easy-to-use interface, novice traders need to understand the risks involved with leveraged trading. On top of the platform’s layers of safety features to protect its users and the platform, traders should also take precautions such as employing risk-management strategies like stop-limit orders when possible to mitigate unnecessary risks.
The Future is LeverFi
We hope this blog has helped you understand the basics of leveraged trading and where you can get started, whether you’re just starting out or a seasoned trader. LeverFi is a game-changer in the leveraged trading space. We are excited to have you onboard our journey!
We cannot wait to hear what you think of LeverFi, so keep engaging with us!
- Visit our website for more information: https://www.leverfi.io
- Follow us on Twitter to learn more: https://twitter.com/leverfi
- Join our fast-growing Telegram community: https://t.me/leverfi
- Read our blog for product updates: https://medium.com/leverfi
- Learn about the LeverFi product design: https://docs.leverfi.io
