VOC Explained

What is Leverage in Crypto Trading?

Adekunle Joshua

Leverage trading is also called margin trading, and it involves using borrowed crypto from brokers to make investment decisions. Traders can decide to borrow capital from brokers to increase their trading volume and resulting profits. 

As another type of crypto trading activity, it is essential to carry out due diligence before getting involved. Leverage trading is a tool that crypto traders use to make spot transactions through the funds they borrowed from crypto brokers. The trader's funds are usually higher than their balance on the trading platform. 

For margin trading that ends up being successful, it is a great means of maximizing profits by increasing the trader's purchasing capacity. A trader with a small crypto holding can benefit from this as they can make crypto trading decisions on a larger volume of capital than what is contained in their portfolio. 

For example, a crypto trader can enter into a margin trading with $100 and use a leverage of x10, which means their margin size is $10,000.

Though this may come with its advantages, it still has some risks. For instance, there is the probability of making huge losses from the margin trading of cryptocurrencies. Having access to borrowed capital may seem like a great deal, but it is plagued with issues that even professional traders face. 

Trading platforms require users to deposit tokens into their accounts which act as collateral, before they can do margin trading. Apart from this, the user also needs to maintain a margin threshold for their trades. If the market moves in the direction that the margin goes below the threshold, the user has to add extra funds to their account or risk being liquidated. 

The popular centralized crypto exchanges that tend to offer this crypto margin trading service are Binance and KuCoin.