LEVERAGE AND MARGIN
TRADING CRYPTO

Consider some leverage and margin trading strategies that investors can implement when trading crypto CFDs. Explore the potential advantages and disadvantages of trading using leverage and learn how to manage risk and mitigate losses.

---

Leverage and margin trading is a risky strategy employed by experienced investors across all markets, but how can it be applied to cryptocurrency trading?

How to leverage and margin trade crypto

Leverage and margin trading crypto involves using capital borrowed from a broker to trade crypto with increased buying power. Crypto investors use their own capital as “margin” to access borrowed capital, known as “leverage”. This enables them to open larger positions than would be possible if spot trading using only their own capital.

Using leverage to trade crypto typically involves using a Contract for Difference (CFD), which is different to simply buying cryptoassets outright. Trading crypto using CFDs enables users to open a position without owning the underlying asset. 

Trading crypto CFDs with leverage can present crypto investors with opportunities to mirror the unique and volatile conditions of the crypto market. As it is common for cryptocurrencies to experience sudden and sharp price movements, leverage trading offers investors the chance to increase their exposure to these fluctuations and capitalise on potential returns.

Please note that CFD crypto is restricted for UK users.

Leverage and margin trading strategies

There are various elements within a leverage and margin trading strategy that crypto traders might consider.

Long and short positions

Users can leverage their positions by either opening a long or short position. This offers them the chance to see returns upon the successful prediction of either rising or falling prices of a cryptoasset. 

Leverage ratios

The proportion of margin to leverage in a position will typically be depicted as a ratio (for example, 1:10, 1:20, 1:30). Crypto traders can select the amount of leverage they wish to borrow depending on their tolerance to risk and the margin (or “collateral”) they wish to provide.

Margin management

Crypto traders can also manage their margins while a position is open with a considered reaction to a margin call, by either increasing their collateral (depositing more margin to maintain the position) or closing the position.

In case of liquidation, investors can also prepare their portfolio by selecting either an “isolated” or “cross margin” approach.

• Isolated margin relates to the collateral for a single position, for which a loss will not impact an investor’s wider portfolio or any other positions in it. 
• Cross margin relates to margin shared across multiple positions, whereby a margin deficiency in any one position will be covered by the returns from any other position.

Leverage and margin: risk management

Users need to be aware that trading CFDs with leverage and margin will extrapolate losses, as well as returns. It is for this reason that investors considering margin trading should do so as a part of a well-thought-out crypto investment strategy.

Although the prospect of using leverage may seem daunting, there are plenty of strategies to help crypto investors maintain a well-balanced risk profile.

• Use a stop-loss to close a position at a predetermined point in the event that the market moves in an unfavourable direction.
• Take profits from a position once it has reached a predetermined level of return. Alternatively, set a series of incremental orders to take profit gradually, rather than attempting to time the market with a single exit point.
• Practise margin trading with a demo account (“paper trading”) to build experience without risking real capital.
• Gradually increase the size of the leverage by starting with small positions and building them over time.
• Limit the time period of open trades to mitigate the risk of sharp, unforeseen price drops or long-term market corrections.

Advantages and disadvantages 

Like any investment strategy, trading cryptocurrency CFDs with leverage has both advantages and disadvantages. In this case, the positives and negatives tend to mirror each other. For example, while margin trading offers the potential for greater returns, it also presents the risk of greater losses in the event of an unsuccessful trade.

Final thoughts

Using leverage and margin to trade crypto CFDs can be daunting for new investors, due to the higher level of risk attached to the strategy itself, and the more volatile nature of the overall crypto market. For new investors, or those unfamiliar with using leverage, it is sensible to get to grips with the fundamentals of the practice before risking any capital. 

For investors with more experience and a higher risk tolerance, implementing leverage trading into a crypto investment strategy can present an opportunity to amplify and optimise positions for greater potential returns.

Visit the eToro Academy to learn more about trading with leverage.

FAQs

Which cryptocurrencies are most commonly traded with leverage?

Large cap cryptocurrencies are typically the most commonly traded using leverage. Although the market remains volatile, these are considered to be lower risk than other cryptoassets with a smaller market cap. Some investors with a higher risk tolerance will trade small cap cryptocurrencies with leverage, but these tend to be more volatile and so the opportunity to lose money is amplified.

Can I lose more than my initial investment?

Trading crypto with leverage magnifies not only potential returns, but also potential losses. When opening a short position, it is possible to lose more money than you initially invested if the price of the crypto rises. If your margin runs low on funds as a result of a losing trade, your broker will issue a margin call, requiring an additional deposit or forcing you to close your position. In this instance, negative balance protection will safeguard your overall portfolio from going negative, but it may reset at zero.

What is liquidation in leverage trading?

Liquidation in leverage trading is the process by which your leveraged position is automatically closed by your broker or exchange in order to prevent further losses. This usually occurs in the event of a losing trade where the value of your position falls enough to threaten the margin requirements.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.