High Leverage In Crypto Is Insanely Risky, But Playing It Safe Can Still Bring Big Rewards

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In cryptocurrency exchanges, leverage serves as a tool that magnifies a trader’s trading capabilities, thereby increasing their potential earnings. Essentially, it refers to the practice where traders borrow assets from the exchange to boost their purchasing and selling power, enabling them to manage larger positions than they could with their initial funds.

The level of leverage available depends on the specific exchange you’re using. More extensive platforms such as Dolomite and Uniswap may provide leverage up to 5 times or 10 times. However, some specialized exchanges can significantly increase this, offering leverage that can reach 100x and even more.

The term ‘leverage’ refers to the ability for a trader to magnify their initial investment. For example, a 2x leverage allows them to invest double the amount of their deposit in a single position, whereas a 10x leverage enables them to borrow ten times the value of their capital.

Using cryptocurrency derivatives like futures and options can yield significant profits for skilled traders. However, it’s crucial to keep in mind that the risks linked with these derivatives can increase proportionally with the potential earnings.

We can better understand this risk by looking at home leveraged trading works. 

To start a leveraged trade, you’ll initially need to fund your account with assets, which will act as security or collateral. The amount of deposit required depends on the level of leverage desired and the scale of the trade position or margin you plan to establish.

To trade $500 worth of Bitcoin with double the leverage, you’ll initially need to put up a collateral deposit of $250. Moreover, the trading platform will expect you to keep enough funds as margin for your trade. If the price of the asset fluctuates negatively, your margin will decrease, and if it approaches zero, the platform may ask you to add more assets to preserve your margin. Failure to do so might lead to the liquidation of your position, resulting in the loss of your entire deposit.

High leverage virtually guarantees liquidation

Using leverage in trading might seem complex at first glance, yet its fundamental concepts are surprisingly straightforward and can be a valuable tool for successful traders, boosting their profits. However, it’s also one of the quickest methods to deplete your savings completely if you lack understanding or even if you’re well-versed but encounter bad luck.

A common error traders may encounter when employing leverage is consistently utilizing the maximum amount permitted by the trading platform. The appeal of such high multipliers, as provided by platforms like PrimeXBT (200x) and Margex (100x), can be overwhelming, particularly if you’re confident in a single market direction. However, it’s strongly advised to resist the temptation of risking everything at once, as these high leverages can potentially lead to significant losses.

The risk associated with leveraged trading lies in its simplicity of losing money compared to making profits. Cryptocurrencies are known for their high volatility, meaning that even during bullish market conditions, their prices can still fluctuate considerably, posing challenges for traders to meet the necessary margins to safeguard their initial investment.

For example, suppose trader Bob invests $1,000 in BTC with a 10x leverage. This means his trading position is equivalent to having invested $10,000, even though he initially provided only $1,000 as a security deposit or collateral.

If Bitcoin’s (BTC) price increases by 1%, Bob stands to make a 10% profit thanks to his 10x leverage. However, if BTC’s value decreases by 1%, he will suffer a 10% loss relative to his collateral deposit. Given that a 1% decrease erodes 10% of his collateral, it doesn’t take much time at all for him to potentially lose his entire deposit. A mere 10% drop in BTC’s price could cause Bob to lose everything he has deposited.

Consider this scenario: If Bob opted for 100 times leverage, the risk of losing everything becomes much higher. A minimal 1% drop in the price could potentially cause him to lose all his investment.

In the world of cryptocurrency, it’s common to see significant price fluctuations of ten or more digits occurring frequently. This makes using even a modest amount of leverage quite risky due to the high volatility.

Winners use leverage wisely

Absolutely, leverage remains a potent resource for traders, allowing them to achieve significant profit enhancements. But remember, we’re not suggesting it should be avoided altogether. Instead, think of leverage as a tool that works most effectively when used sparingly.

Astute traders may prosper greatly with the use of up to 5 times or 10 times leverage, as this allows them to maintain the necessary collateral margin to prevent liquidation. Given that cryptocurrency prices tend to fluctuate significantly but rarely exceed changes of over 10%, using lower leverage enables them to make well-considered risks, thereby enhancing their likelihood of a substantial profit by a considerable margin.

To put it simply, to have a more diverse trading experience, instead of sticking with specialized high-leverage trading platforms, which often lack additional trading features due to their narrow focus, consider using a multi-purpose platform like Dolomite. This versatile choice offers access to a wide range of DeFi functionalities that extend beyond mere trading, including borrowing, lending, providing liquidity, staking, re-staking, liquid re-staking, and yield farming.

As a crypto investor, I’m excited to share that Dolomite has announced an upcoming airdrop campaign! This airdrop is linked to a recent activity snapshot and will distribute DOLO and veDOLO tokens to users. The rewards are scaled based on platform activity, and participants in the Minerals Program can look forward to even more benefits. This initiative underscores Dolomite’s commitment to rewarding its community while pioneering cutting-edge DeFi solutions.

Dolomite stands out by not solely relying on high leverage, providing a broader selection of assets that offer 5 times to 10 times leverage compared to platforms such as PrimeXBT and Margex. It also introduces an innovative feature called “margin pair trading”, allowing users to trade the relationship between any two digital assets rather than being limited to US dollar-denominated values. This enables users to explore more intricate trading strategies.

Apart from this, Dolomite enables traders to gain passive income through automated returns. As soon as a cryptocurrency is deposited onto its platform, it moves to one of its decentralized exchange (DEX) liquidity pools and starts generating interest that gets returned to the user. This process continues even when the trader is employing the deposited crypto as collateral for their margin trades. Additionally, they will receive a LP token which can be utilized to borrow other cryptocurrencies, including yield-bearing ones such as jUSDC, thereby enhancing their earnings. All the while, traders can concentrate on their leveraged trading activities.

In essence, the tale teaches us that while leveraged trading can be an effective tool for seasoned traders to amplify their profit opportunities, it’s unwise for anyone to heavily rely on this strategy without considering the significant risks associated with overconfidence and excessive greed. Few traders can maintain profitability in the long run when enticed by high levels of leverage.

In my role as an analyst, I can’t stress enough the importance of smart decision-making in leveraged trading. It’s crucial to avoid over-borrowing, as this could potentially expose you to unnecessary risks. Even when enticing profit-enhancing mechanisms are available on certain trading platforms, it’s essential to remember that caution is key.

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2025-01-06 17:11