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Bitcoin Leverage And Margin Trading in 2022: Strategies

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|Updated March 22, 2022 06:44
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The massive 2021 crypto bull run saw the price of a Bitcoin jump from $30000 in January, to an all time high of $69000  In June. However, the price is currently trading at $38,818.52. The huge volatility caused a buzz and attracted a lot of attention, boosting mainstream interest in digital tokens. People scoured all over the web looking for ways to profit from the fast and deep price swings.


Bitcoin price chart today from Mitrade▼

Sell    Buy  


Bitcoin CFD Trading

Many forex broker platforms saw a gap and introduced Bitcoin CFDs ( Contract For Difference) to cater for the interests of the growing number of crypto investors.  CFD is a financial derivative that allows traders to speculate on the future prices of an instrument. It enables crypto traders to capitalize on Bitcoin's high volatility to make money regardless of the price direction.  Investors profit on the market movement without actually owning bitcoin.


CFD provides the opportunity to profit by going long(Buy) or short (sell).


→ Buy Bitcoin (BTC/USD) if you believe the value will grow. You get profit when the market price increases.


→ Sell bitcoin (BTC/USD) if you think bitcoin price will fall ↘. You make a profit when the value dips.


A combination of leverage and margin makes Bitcoin one of the favorite tradable financial instruments. But the big question is, how can you use leverage and margin to make money from Bitcoin trading? Do not fret. This piece has everything you need to know.


What is Bitcoin leverage Trading?

Bitcoin leverage trading refers to using leverage offered by brokers to get bigger market exposure. It enables traders to open Bitcoin (BTCUSD) positions without necessarily holding the underlying crypto coins. The common types of leverage products include bitcoin futures, bitcoin CFDs, and bitcoin options. Trading leverage is expressed as a ratio. 


If you are trading bitcoin with a broker that offers 50:1 leverage, you can hypothetically use $200 to trade $10,000 worth of bitcoin.

trading on leverage bitcoin


Different brokers offer varying leverages for bitcoin trading typically between 1: 2 and 1:100. Despite the numerous advantages you need to understand the risks of leverage. High leverages can lead to massive losses if the trade goes south, especially during high volatility. 


Why Trade with Leverage?

✅ Leverage allows you to control much larger positions than your account deposits. 


For example, a 1:100 leverage means that for every $1 in your trading account, you can control $100.   

So if you have $1,000 in your account, you can potentially buy or sell $100,000 worth of any tradable instruments. The broker hypothetically lends you the rest of the money. Without leverage, you have to raise the whole $100,000.


✅  Leverage magnifies your potential profits. 


Here is an example. A deposit of $1000 enables you to open a $100,000 position (1:100 leverage). If your position makes 1% profit, you gain $1000 or a massive 100%.  Without leverage, a 10% gain on your $1000 investment equates to  $10.


How does Bitcoin leverage Trading work?

As mentioned, leverage allows you to open bigger trading positions. Essentially, it multiplies your account balance and increases your trading capital significantly. Therefore, leverage trading enables you to make a massive profit with small capital. 


Leverage and margin go hand in hand. Margin is the actual amount required to open a leveraged position.  Think of margin as a good faith deposit or collateral and leverage as the multiplier. 


Let’s assume the broker requires a 2% margin to open a trade. In simple words, you need to put up 2% of the trade size to open the position.  To open a Bitcoin position worth $100 and the margin required is $2. Therefore, you control $100 using $2. The margin required is 50 times less than the position size. The leverage is, therefore, 50:1. 


Example of Bitcoin Trading With and Without Leverage


Let’s go deeper to see the difference between trading with leverage and without.  If you buy $400,000 worth of bitcoin at $40,000 per BTC and sell at $41,000, it means you need $400,000 to make a $10,000 profit. This is unleveraged bitcoin trading on CFDs.


On the other hand, a leveraged Bitcoin CFD trader requires a $10,000 account and 1:40 leverage to make the same amount. The leverage gives him control of $400000.


Unleveraged

Leveraged

Capital Required= $400,000

Capital Required=$10,000

Profit= $10000

Profit= $10,000


Leverage And Margin Trading- a Double-Edged Sword

Bitcoin leverage trading enables you to accomplish a lot more with less. Conversely, you risk losing more if the trade doesn't move in your favor.  


In our example above, a $10000 loss means the unleveraged trader will lose 2.5% of their capital if the trade goes against them. The leveraged trader, on the other hand, will lose 100% of the $10000 margin requirement. A margin call will force you to liquidate the whole trading capital. 


Losing 100% of your deposit may sound extreme. But with the volatility of bitcoin prices, it is fairly common for its value to swing 10% in a week. At the peak of the volatility, bitcoin’s value once dropped 30% in one week.  In contrast, many currency pairs will barely move 1% all week.


With this in mind, it is imperative that you consider the risk involved before opening leveraged bitcoin trading positions. You don’t have to bet your entire account on trade even when a broker offers more than 50:1 leverage. You can reduce leverage on specific positions simply by reducing the position size. 


Here is an example: 


Jack and Jill both have $10,000 trading accounts with a broker that offers up to 50:1 leverage for bitcoin trading.



Jack

Jill

Capital

$10,000

$10,000

Leverage Used Per Position

50:1

5:1

Value of Transaction

$500,000

$50,000

Loss after a change of $100  in BTC value

-$5,000

-$500

% of capital lost

50%

5%

% of capital remaining

50%

95%

% of remaining capital needed to get to breakeven

100%

5.5%


Jack chooses to go all-in with a BTC sell position by taking the full 50:1 leverage (50 x $10,000 or 50 lots). This means selling $500,000 worth of Bitcoin.  Let's assume the value of bitcoin was at 8170 at the time of the trade entry.  If it  falls by $100 to $8070, Jack will lose $5,000 or 50% of the capital in his trading account.


Jill, on the other hand, is wary about high leverage and trades with minimal risk only using 5:1 leverage (5 x $10,000 or half a standard lot which is 0.5 lots). After losing the trade, Jill would have lost only $500 or 5% of his trading account.


So while Jill has 95% of her capital intact, more than enough to open other positions. Meanwhile, Jack is down by 50% and will need to raise a massive 100% of the remaining capital to break even. Jill, however, will break even once a winning trade returns 5.5%.


Keep this comparison table in mind as you embrace leveraged bitcoin trading.


Leverage and Risk Management Strategy

With our illustration above, you can see how leverage can hurt your trading account when it goes against you. So what should you do?


1. Don’t bet the farm


In our example, Jack risked half his capital on one position. This is wrong. Every trade can turn to a loss regardless of the success rate of your trading strategy. Bitcoin trading is riskier due to the high volatility. Therefore, you should risk 3% at most of your account balance. Risk management helps you withstand several losing positions if trades head south. 


Additionally, huge losses can trigger fear and other emotional behaviors. They increase the chances of losing the remaining capital, making it hard to break even.


2. Use Stops


Also known as stop-loss, this is a price level where a losing position closes automatically. Setting fixed stop-loss lets you know the amount you risk losing if the trade fails.  The position of your stop-loss depends on your trading strategy. Ideally, you should set stops at a point where the trading position becomes invalidated.


Unfortunately, standard stops are not always honored. Trades close at the best available price depending on stop level. During extreme volatility, the best available price might be pips away from your actual stop loss. This is yet another reason why you should risk small amounts per trade.  If you risk 1% and the price overshoots your stop by 2%, your loss would only increase from 1% to 3%.  However, if you risk 10%, you risk making a 30% loss.


3.  Consider Guaranteed Stops


Guaranteed stops function like conventional stops with an added twist. The broker will close your position at the designated stop loss regardless of what happens in the market. This means high volatility or weekend gaps will not affect your positions.


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What is the Best Leverage Ratio for a Beginner?

Depending on the broker of choice, you can get anything from 1:2 to 1:100 leverage. However, as a beginner, you should not get swayed by these figures.  


Low leverage brokers help you avoid excessive risk.  For bitcoin leverage trading, do not use more than 1:5 leverage. You can go as high as 1:10 for other less volatile instruments.


Remember, it is not compulsory to use the full leverage advertised by the broker. 


By varying your trade sizes appropriately (like Jill in our example), you can still trade with 1:5 leverage even if the broker offers 1:100 leverage.


Choose Bitcoin and Crypto Trading Platform with the Best leverage

Choosing the best leverage is solely your call. Once you settle for a leverage level, find a broker that gives you the flexibility to vary the ratios.


Remember, the leverage allowed for bitcoin trading will typically be lower than the maximum leverage advertised on the broker’s website. Find out the details before you commit to any broker.


There are many forex brokers today offering bitcoin and other cryptocurrency CFDs. Review each and select one that appeals to you. Don’t forget to consider other essential factors like the spread charged, execution speed, and commissions.


How to trade crypto on Mitrade?


Mitrade is one of the best platforms today for bitcoin leverage trading in CFDs. The broker perfectly understands the importance of protecting traders from Bitcoin volatility by limiting the leverage on the crypto to 1:2.  Mitrade offers a maximum of 1:30 leverage for standard forex currency pairs.




To start crypto leverage trading on Mitrade, follow these 4 steps:


1. Go to Mitrade trading platform 


2. Search the markets you want to trade and select it


3. Open a Long or Short position


4. Set up your position size and Confirm the trade



Reliable and Regulated Mitrade is regulated by the ASIC in Australia. Its proprietary platform makes it easy for everyone to access bitcoin leverage trading.



【Competitive Cost, 24-hour Trading】  Zero commissions, low overnight fees, and competitive and transparent spreads. Your deal order shows all costs.

 

【Low Deposit High Leverage, Trading Anytime Anywhere】 The minimum size per trade is as low as 0.01 lots for many markets. Leverage is up to 30:1. You will enjoy seamless trading via iOS and Android mobile apps and web platforms.


 

【Good liquidity, efficient and convenient】 Provide more than 300 popular global trading instruments and T+0 settlement. The platform is highly flexible and efficient



👉Practice on Mitrade platform▼

mitrade


Conclusion


Cryptocurrency leverage trading can be highly rewarding if you understand CFDs trading. The instrument's volatility increases the chances of making more profits than you would ordinarily get by trading currency pairs. 


However, volatility is a double-edged sword, especially when combined with high leverage. Bitcoin CFD traders should, therefore, keep a lid on their risk at all times to achieve long-term success.



You May Also Like


Buying Bitcoin with a Credit Card or Debit Card

10 Ways You Can Do To Make Money with Cryptocurrency

Top 10 Best Cryptocurrencies Worth Investing


* The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. *CFD trading carries a high level of risk and is not suitable for all investors. Please read the PDS before choosing to start trading.


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Risk Warning: Trading may result in the loss of your entire capital. Trading OTC derivatives may not be suitable for everyone. Please consider our legal disclosure documents before using our services and ensure that you understand the risks involved. You do not own or have any interest in the underlying assets.

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