Why is using leverage is incorrectly considered risky in Crypto
As a former forex trader when joining the beautiful world of crypto trading I couldn’t help but notice how misunderstood the words “leverage” or “margin” are within crypto communities around. Not leverage is dangerous but the lack of information and knowledge about the most efficient way of using it or even how to use it is the main reason for this misunderstanding.
Back in early 2000s, brokers were able to offer up to 400:1 leverage, meaning that with a mere $100 deposit, anyone would be in control of $40,000 in currency on the global market. Unfortunately for some professionals and fortunately for most retail investors, the financial regulations limited the leverage ratio in US to a maximum of 50:1. This at first seemed as a huge decrease but still powerful enough to magnify your capital 50 times of what you actually are ready to trade with.
Why Leverage Is Incorrectly Considered Risky
Trading with leverage is believed to be very high risk instrument because it magnifies both the potential profit and potential loss that can occur after you’ve set up your trade using it. This statement is correct, however, there is a reason why instruments such as leverage are very respected amongst sophisticated traders in forex.
The Truth About Leverage
Trading with leverage is actually a very efficient use of your trading capital and there is a reason why do professional traders see it as a very precious tool. It allows them to trade larger positions (contracts) with a lot less trading capital required. Using leverage doesn’t actually alter your potential profit or loss from the positions that your trade can make but it reduces the trading capital that you must use in order to take advantage of it.
As an example — Instead of opening a trade with $10,000 for 100 contracts, you can execute practically the exact same trade with $1,000 for 100 contracts using 10:1 leverage, leaving your other $9,000 as available margin for other trading opportunities.
It all comes down to how experienced you are as a trader and how much actual practice you’ve built up over time. I’ve compiled this very short list of a few common sense steps you can take in order to improve yourself.
General Trading Tip List:
- Keep your feelings aside. If you become emotional, you’re twice more likely to lose.
- Use trailing stops to reduce setbacks and never ever go without having a stop loss in place when a trade is open. BTC is a 24/7 market and you have absolutely no clue what might happen overnight.
- Limit margin used to 1% — 2% of your total capital on the exchange for each position taken.
I’ve been asked a lot about on where to trade when it comes to cryptocurrencies as a lot of fx traders are now looking to apply their skills to this green market. I personally trade on BitMEX as it has the biggest 24hr turnover, therefore the biggest liquidity occurs there. It does come with a few drawbacks such as a very ugly interface but once you get used to it, it actually doesn’t matter all that much. So here’s another short BitMEX tiplist I suggest you to follow in order to reduce your risk trading on that platform.
BitMEX Tip List:
- Start with a small amount. Once you start trading, only deposit a small amount into your account. This will reduce your losses if the market moves against you and you accidentally place the wrong trade.
- Limit your leverage. Don’t be tempted by the potentially greatest possible leverage. Especially in the beginning, you should minimize the amount of leverage you use, as this can make it easier to limit risk.
- Once you have made your first trades, it is important that you simply study and take notice of the order screen. The area that you should pay explicit attention to is the “cost”, as this shows the largest amount that you can lose on your trade.
- Take a notice of the fees — BitMEX will charge a taker fee of zero.075% of the total position if you use the “Market” tab once you have a gap in the position. However, if you choose the “Limit” tab to become a market maker, you will really get a discount of 0.025% of your total position.
So, is 100x on BitMEX a time bomb or just pure masochism?
Neither. If used properly, it is very efficient way to trade on more positions at once. BitMEX allows for both — cross and isolated margin. By default the platform is set to Cross, which means that the full wallet is utilized to avoid liquidations across multiple positons.
But then why do people say it’s bad?
It is proven, generally, that most retail traders lose money and the inability to properly use leverage and the way it works is the core problem.
Realistically speaking, the pros of using leverage outweigh the cons and that’s why most forex brokers who don’t have it as an instrument are regarded as useless. For cryptocurrencies, however, given the amount of volatility I wouldn’t recommend using more than you’re comfortable trading with since it is indeed troublesome to get your head around the massive swings occurring in this industry.