Leveraged trading has become increasingly popular in cryptocurrency markets. Before using leverage, you should take time to understand how it works and the benefits and risks.
Overview
- Leverage allows you to enter positions larger than the funds in your trading account. Interdax offers up to 100:1 leverage.
- Leverage can amplify a trader’s profits. But be careful, as leverage can equally amplify a trader’s losses.
- Margin is used to create leverage, and the two concepts are inversely related.
- Higher leverage increases the chances of liquidation. Start off with a small leverage of 2:1 or 3:1 and work your way up with experience.
- Initial margin is the amount required to open a leveraged position, while the maintenance margin is the amount required to keep the position open.
Understanding Leverage
Leverage enables you to open a position larger than the value of the funds in your trading account. In essence, borrowed funds are used to open a leveraged position, where the term leverage refers to the multiple of the amount of the asset you are trading for a particular order and is often expressed as a ratio (e.g., 100:1).
Margin (which refers to the debt or money borrowed by a trader for a position) is used to create leverage (which simply refers to taking on debt). Two related concepts are:
- Initial margin (the amount of money required to enter a leveraged position), and
- Maintenance margin (the amount of money that has to be held in the account to keep the position open).
Using leverage is a double-edged sword. While leveraged trading can amplify your profits, it can also swell your losses. The larger the leverage, the higher the maintenance margin is to accommodate the risk of liquidating large positions.
Higher leverage will increase the risk that your trade gets liquidated, as the liquidation price will be closer to your entry price. You should start off with small leverage until you are comfortable and work your way up to higher levels of leverage, if needed.
Example
For instance, if you have 1 BTC in your trading account and open a position with a value of 3 BTC, then your leverage on that trade is 3:1.
If bitcoin moves up $100, your position value will increase by $300. Similarly, if bitcoin moves down by $100, your position value will decrease by $300. Once you close the position, your account balance will be 1 BTC plus any profits (or minus any losses) from your leveraged trade.
Interdax offers leveraged trading of up to 100:1, where the maximum leverage is applied by default in your main trading account. Suppose you wanted to buy 31,000 contracts of BTC-PERP, which represents the price of bitcoin at $1 each. The position of 31,000 contracts translates into a position value of roughly 3 BTC.
How to Use Leverage on Interdax
On the Interdax platform, leverage is implicit. Your leverage is based on the position size and the funds you have in your trading account.
Suppose you have 1 BTC in your trading account. Your leverage is then determined by the position size. For example, if the price of bitcoin is trading at $9,000, you can buy 90,000 BTC-PERP contracts to apply x10 leverage or buy 180,000 BTC-PERP contracts to apply x20, and so on. The leverage for a position is displayed in the positions panel.
You can also create sub-accounts to specify your leverage. For example, if you have 10 BTC in your main trading account, you can transfer any amount to a sub-account and then enter a position to ensure that the leveraged position does not affect the holdings in your main account.
If you transfer 0.1 BTC to the sub-account, the largest leveraged position you can then enter will be around 10 BTC. If the leveraged trade using the sub-account is liquidated, no funds are lost from the main account.
For instance, the position panel above shows that with a sub-account balance of 0.1 BTC, you are able to enter a position with a value of 9.8849 BTC and the leverage used is x96.16. Since position size is 92,000 and each BTC-PERP contract is worth $1, the implied leverage will change as the mark price changes.