What You Should Know About Leverage In Crypto Trading

It’s not always obvious yet it can help you stop losing money

I can’t count the number of times I’ve heard people say that you should stay away from leverage trading so as to succeed in crypto.

I don’t think this is good advice.

Nonetheless, leverage has been a hot topic since the infamous May 19 crash that resulted in one of the largest liquidation events in Bitcoin’s history.

On that day, more than $9 billion positions got wiped out due to margin calls. It was the moment that crypto critics had been waiting for.

In the weeks that followed, there was unceasing chatter around crypto regulation and unrelenting calls on regulators to rein in crypto exchanges offering crypto futures.

Seeing things were going out of control, the exchanges decided to introduce some measures. The one that stands out is the reduction of leverage that beginners can access.

Right now, Binance (where I trade futures) allows new accounts to access up to x20 leverage. Previously, you could play with up to x100 any day.

Perpetual Futures

Perpetual swaps are a type of futures contract without an expiration date that are pegged to spot prices.

But futures have a few unique attributes that you won’t find in spot trading.

1. With futures, you can short.
2. You can access leverage.
3. You can see the profit and loss of open positions in real time.

I have been using leverage since Binance launched perpetual futures trading over two years ago. Like any other market, crypto futures have both pros and cons.

The best thing about leverage is that it essentially multiplies price swings.

So, if you’ve opened a trade with 0.5 ETH with 5x leverage and price moved down 10%, you’re going to lose 50% on that trade. This means you’d be left with 0.25 ETH. If the price goes up, you’d gain 0.25 ETH.

How it really works?

An exchange, say Binance, leases you money according to your account balance and leverage. So, if you have 0.5 ETH and 5x leverage, Binance will provide you additional 2 ETH for your trade.

When you close that trade, Binance will take its 2 ETH back and some commissions. And you get what’s left.

In the worst case scenario, you will be liquidated. This happens when prices move against you especially during volatile markets.

I got liquidated twice when I was just starting out but it didn’t hurt much because this was just a small amount of money to get my feet wet.

Back then, perpetual futures were a complex product, and it was not easy getting around as a beginner.

There was also a lot of excitement around leverage even though very few people understood exactly how perpetual futures work.

But thankfully, crypto futures have seen a lot of improvement over time and as a beginner, I think this is the best time to get acquainted with this segment of the crypto market.

Trading Platform

As we have seen, futures are more complex than spot trading. As such, beginners often experience problems getting acquainted with these products.

But the platform a trader chooses often makes a huge difference on how smooth their trading journey will be.

There are many platforms offering futures trading, but many experienced traders often recommend Binance.

What sets Binance apart is:

• The platform has more complex trading tools, which are straightforward and easy to use.
• The hedge mode — This feature is unique to Binance and it allows you to open two trades of the same contract going different directions at once. In other words, you can long and short the same coin at the same time, without either of the positions cancelling the other.

For example, if you long ETH on Kucoin or Phemex and then discover a short opportunity, you’d have to first close the long so as to short. However, a trader who is on Binance can keep both trades open, as long as the hedge mode is activated.

• Binance now offers BUSD Margined Futures alongside USDT Margined Futures and Coin Margined Futures.
• Binance has hundreds of BUSD and USDT denominated altcoin trading pairs.
• Binance Futures profit & liquidation calculator — This is an advanced calculator as it can calculate the PNL (profit and loss) and the liquidation price for your positions in the BUSD-margined Futures, USDT-margined Futures and Coin-margined Futures.

Final Thoughts

It’s a no-brainer why a person with a fat account would diss leverage. For such a person, the risk of using leverage is too huge. And if you’re rich, you’re better off without leverage anyway.

But the fact is, leverage trading has created a balance or a bridge which anyone can use to become a competitive and profitable trader.

Even so, extremely high leverage provides very little margin of error during periods of high volatility, as prices move in different directions within seconds, giving you little time to react.

Simply put, high leverage will get your account liquidated fast.

If you are just starting out as a futures trader, you should always remember that leverage trading is a very calculated skill.

It takes extreme discipline because you have to avoid most entries that you want to take and wait for entries that you’re scared to take.

You also have to be calm after entry, confident in technical analysis and recognize invalidation criteria quickly.

Above all, you must use a stop loss in every trade you take to mitigate risk.

Key Takeaways:

• Trading perpetual futures is fine.
• The easiest way to succeed is to choose the right trading platform.
• To succeed, you have to develop a trading strategy.
• To stay in the game for long, you must employ risk management.

Part 2 of this series explores the recently introduced BUSD Margined Futures and how you can develop a strategy around this product to become a successful trader. Read Part 2 here.

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