In cryptocurrency trading, leverage allows traders to amplify their trading capacity, and therefore their potential profits. It’s the term used to describe when a trader borrows assets from an exchange so they can increase their buying and selling power, in order to control a much larger position than they could do with their existing capital.
Depending on the exchange used, the amount of leverage varies. While more comprehensive exchanges like Dolomite and Uniswap might allow for 5x or 10x leverage, there are some specialist exchanges that can boost this all the way up to 100x and beyond.
The leverage describes how much a trader is able to multiply their capital. For instance, a 2x leverage means they can open a position with twice as much capital as their deposit, while 10x means they can borrow time-times the amount of capital they have.
Leverage is often used with crypto derivatives, such as futures and options contracts, and it can be extremely profitable for successful traders. But of course, it’s important to remember that the risks associated with leverage are amplified just as much as the potential profits.
We can better understand this risk by looking at home leveraged trading works.
The first step is to deposit assets into your trading account to open a leveraged trade. The deposit serves as collateral, and varies based on how much leverage you’re looking for, as well as the size of the position or margin you intend to open.
If you want to trade $500 in BTC with 2x leverage, you’ll need to deposit $250 as collateral. In addition, the exchange will also require you to maintain a sufficient margin for your trade. If the price of the asset you’re trading moves in the wrong direction, the margin will drop significantly, and if it gets close to zero, the exchange will request that you add more assets to protect your margin. If you don’t do this, it will liquidate your position, and you’ll forfeit the entire collateral deposit.
High leverage virtually guarantees liquidation
Leveraged trading may sound complicated, but the basics are really quite simple, and it can be an extremely useful feature for profitable traders, helping to accelerate their gains. However, it can also be one of the easiest ways to lose your entire nest egg, if you don’t know what you are doing, or even if you do know, but fall victim to plain old back luck.
One of the biggest mistakes a trader can make when trying to use leverage is to always use the maximum allowed by the exchange. This can be extremely tempting, especially if you’re “convinced” that the market is heading in only one direction. The temptation of enormous profits offered by platforms like PrimeXBT which offers an incredible 200x leverage, and Margex, which goes up to 100x, can be very difficult to resist, but it’s highly recommended that you should indeed, refrain from going all-in.
The danger of leveraged trading is that it’s far easier to lose than it is to win. Crypto assets are notoriously volatile, and even if the market is experiencing bull conditions, prices will still go up and down by a fairly significant degree, making it difficult for traders to maintain the margins required to protect their deposit.
For instance, let’s imagine that trader Bob has $1,000 and he’s going to open a position on BTC with 10x leverage. The leverage means Bob’s position is actually worth $10,000, even though he only put down $1,000 as collateral.
If BTC’s price goes up 1%, Bob’s gain will be 10%, due to the 10x leverage. But if BTC’s value drops by 1%, his loss will amount to 10% of his collateral deposit. Because a 1% drop eliminates 10% of his collateral, it doesn’t take long at all for the entire deposit to be wiped out. If the price of BTC fell by just 10%, Bob would lose everything.
Now imagine if Bob had chosen 100x leverage, the risk of losing it all is multiplied significantly, as a 1% price decline would be enough to wipe him out.
The risk is that double-digit asset price movements happen with alarming regularity in crypto, making even small amounts of leverage very risky.
Winners use leverage wisely
Of course, leverage is still a powerful tool for traders and it can help them to realize some very substantial profit increases. So we’re not saying never to use it. Rather, leverage is a tool that’s best used in moderation.
Smart traders can do exceptionally well by using leverage of 5x or 10x at the most, which should ensure they have enough capital to maintain the collateral margin that’s required to avoid liquidation. After all, while crypto asset prices can be volatile, it’s not every day that they see drops or gains of more than 10%. By using lower leverage, traders can take a more calculated risk, increasing their chances of a (still significant) profit by a fairly big degree.
For this reason, it’s recommended to avoid exchanges that specialize in high leveraged trading, as such platforms are so focused on this that they lack many advanced trading features. By using a more versatile platform, such as Dolomite, traders can tap into an extensive ecosystem of DeFi capabilities that go well beyond just trading, such as borrowing, lending, liquidity provision, staking, restaking, liquid restaking and yield farming.
Dolomite has also announced an upcoming airdrop campaign tied to a recent snapshot of user activity. The airdrop will reward users with DOLO and veDOLO tokens, scaling rewards based on platform activity and offering additional benefits for Minerals Program participants. This initiative further highlights Dolomite’s focus on incentivizing its community while delivering innovative DeFi solutions.
Dolomite can offer these features because it’s not exclusively focused on high leverage. In fact, the range of assets it can offer 5x to 10x leverage on is far greater than platforms like PrimeXBT and Margex. It also offers a novel feature known as “margin pair trading”, where the ratio between any two digital assets can be traded, instead of being restricted to values denominated in US dollars. This gives users the flexibility to adopt more complex trading strategies.
In addition, Dolomite offers traders the bonus of earning automated yield. From the moment they deposit a crypto asset on its platform, it will instantly go to one of its DEX liquidity pools and begin earning interest that’s returned to the user. And it will carry on doing so even while the trader is using it as collateral for their leveraged trades. They’ll also receive an LP token that can be used to borrow other crypto assets, including yield-bearing ones like jUSDC, further boosting their rewards. And all the while, they’ll be able to focus on their leveraged trading.
The moral of the story is that leveraged trading is surely a useful weapon for experienced traders to boost their profit potential, but only a fool would go all-out with this strategy and leave themselves exposed to the kinds of risks that come from getting too greedy. The reality is that very few traders remain profitable for long when tempted by massive amounts of leverage.
As with everything, leveraged trading requires traders to be smart and maintain a delicate balancing act. Don’t borrow too much and leave yourself exposed. Especially when some trading platforms offer alternative mechanisms for increasing your profits.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
