Leverage for cryptocurrencies
Any trader is familiar with margin trading. Considering the size of a standard lot on the currency market (100,000 of the base currency), the leverage provided by brokers allows traders to open trades with a deposit of tens or hundreds of times less.
Many cryptocurrency exchanges also have a leveraged trading option. However, compared to the foreign exchange market, it has a number of differences, which we will look at today.
Learn more about margin trading and leverage from this article.
Leverage for bitcoin - to take or not to take
The first difference between margin trading on cryptocurrencies and trading on the foreign exchange market is that the trader can choose whether to use leverage or not.
If the vast majority of traders simply do not have the opportunity to trade without leverage, the cryptocurrency exchanges by default transactions are opened without using it - margin trading is an additional option, and it is up to the trader to use borrowed funds for trading cryptocurrencies or not.
Leverage size: less is not worse
The second feature of margin trading on the cryptocurrency market is leverage. Let's compare the amount of margin on the stock, currency and cryptocurrency markets.
The price of stocks on the stock exchanges quite allows the trader to trade with only $100 on the deposit. However, the profit from such trading on such a scale will be penny. That is why at stock exchanges the leverage in the size from 1:20 or 1:25 and higher is applied.
As the experts of Fortrader.org have already said, it makes little sense to trade without leverage in the foreign exchange market because of the rather low volatility of currency pairs. Brokers licensed by the Central Bank of Russia provide no more than 1:50 leverage. In other companies you can find the leverage for all tastes and colors, up to 1:1000.
The volatility of cryptocurrencies is much higher than that of traditional exchange-traded assets. You don't have to go far to find an example - April 12 bitcoin to the dollar In just half an hour, it added $1,000 in value at once, which is simply unthinkable for the foreign exchange market. Such volatility gives the trader the opportunity to make a profit without using leverage.
For this reason, cryptocurrency exchanges practice a margin of about 1:3Although on some sites you can find a leverage of 1:100.
Where do funds for margin trading come from?
The third difference is the source of funds that are used for margin trading.
With the stock and currency market, everything is very clear - credit funds are provided to the trader by the brokerage company. In the cryptocurrency market, there are two options - exchange and investor.
In the exchange version credit funds for margin trading are provided by the cryptocurrency exchange itself. Such exchanges include, for example, Kraken. Naturally, exchanges with impressive capitalization can afford such an approach. The amount of leverage depends on the liquidity of the cryptocurrency asset and can reach 1:5. In this case there are no differences from traditional margin trading.
More interesting investment option. Any user of a cryptocurrency exchange can be not only a trader, but also an investor. That is, an investor is a person who provides a trader with credit funds for margin trading, receiving a certain percentage for using the credit. At the same time, the amount charged for the use of credit funds is determined by each investor for himself.
In more detail, the investor option looks like this:
To borrow money, the trader places an application, in which he indicates the amount required and the terms on which he is willing to take it on credit.
This order is entered into the register, which is called the "Collateral Trading Order Book", after which the exchange automatically begins to search for credit offers that meet the conditions specified in the trader's application.
When the necessary funds are found, the application is entered into the "Trading Order Book", also known to many traders as the "Order Book".
Thus, leverage in the cryptocurrency market provides an opportunity to profit not only for the trader, but also for investors. It is worth noting that with this option of credit, the margin is approximately 1:2 or 1:2.5, which minimizes the risks for the trader. The risk for the investor is virtually reduced to zero, because the exchange will automatically close unprofitable transactions when the trader's account falls below the required margin.
Conclusion
Certainly, margin trading provides an opportunity to make quite large profits. However, in such a highly volatile market as the cryptocurrency market, it also means huge risks. Cryptocurrency pairs sometimes exhibit such impressive leaps that leverage can bring your deposit to zero in minutes.
It should always be remembered that leverage in the cryptocurrency market can both enrich and ruin the trader.