Leverage Trading – Is It Worth the Risk?
Leverage trading is one of the most controversial subjects discussed by cryptocurrency investors. Some experienced crypto traders are enthusiastic about the possibility of using leveraged trades to increase their profits. However, most investing experts warn that trading cryptocurrencies with leverage is very risky, and should generally be avoided. But what is leverage trading exactly, and is it really worth the risk?
What Is Leverage Trading?
Leverage trading is a method of investing in cryptocurrencies in which you buy crypto derivatives called futures instead of purchasing actual digital assets stored on the blockchain. Since you don’t actually acquire any crypto but only speculate on the future price of the asset you trade, you are able to utilize leverage, which simply means that you can potentially make a higher profit on a successful trade while still investing the same amount of money.
While the idea of leverage is complicated in theory, it is very intuitive and easy to understand in practice. For example, trading with a 2x leverage means that you can make twice as much money as you would normally do without the leverage. For example, if you buy a cryptocurrency with 2x leverage and its price increases by 100%, your return of investment is not 100% but 200%.
Most of the time, the leverages people use while trading crypto are much higher than 2x. Many crypto derivatives exchanges enable the users to trade not only with small leverages like 2x, 5x or 10x, but even with very huge leverages like 50x and 100x, which can in theory provide you with massive gains for a minimal initial investment. So what’s the catch?
The Risk of Leverage Trading
The reason why most investment experts try to discourage beginners from trading with leverage is quite simple: the leverage works both ways. So if you buy some crypto with 2x leverage and the price goes up, you make twice as much as you would normally do. But if the price goes down, the same logic applies and you lose twice as much!
With small leverages such as 2x or 3x, the risk is not that big. Even if the price goes down temporarily, there’s a chance that it will soon rebound, allowing you to make profit.
However, the risk increases proportionally to the leverage. With higher leverages, even very small price movements can massively affect your profits. If you trade with very high leverages such as 50x, even if the price goes down by a little, you will start losing money extremely fast, until your position is liquidated and your funds are gone.
Is It Worth It?
Most investors agree on one thing: beginners should always stay away from leverage trading, because the risk of losing all your money massively outweighs the potential chance of making a larger profit. However, if you are already an experienced crypto investor, you can try trading with leverage, as long as you stick to small leverages such as 2x, 3x or 5x. And make sure to remember the most important rule of investing: never invest more than you can afford to lose!