What is leverage and how to earn with its help

In this lesson, you will learn:

What is leverage
What is margin trading

Let’s understand what margin trading on the markets is and how it works on the example of a crypto exchange and Petya, who is ready to invest only €100.

ABOUT PETYA’S €100

Petya found out that margin trading in cryptocurrency can bring a quick income. Petya decided to buy bitcoin.

The price of bitcoin at the time of his interest was €8931. Petya believes it will continue to rise and would like to buy 10 bitcoins right now. But the full price of the position for 10 bitcoins would be €89,310. First of all, that’s a large amount of risk. Secondly, it’s just a large amount of money and Petya would like to start with €100.

There is no money, but Petya would like to buy bitcoins. What to do. On the main trading screen, Petya looks for the Bitcoin / EUR pair. He clicks Buy and selects leverage trade in the upper left corner.

LEVERAGE 20:1

With €100 in Petya’s account, the platform offers 20:1 leverage – for every €20 in the position, he needs to invest €1 from his account. The transaction (the amount with which Petya can buy bitcoin) will be €1500. The down payment – his money for the transaction – will be €75.03. From the exchange, Petya will receive about €1425. The trading commission is €1.12 and the leverage fee is -0.0100%. With this investment, Petya will buy 0.167 bitcoins.

Suppose bitcoin soon rose to €10,000. By selling his 0.167 bitcoins, Petya will receive €1670. From that, let’s subtract €1425 – this amount of leverage must be returned to the cryptocurrency exchange. Petya will be left with €245, of which €75 is Petya’s money and the remaining €170 is profit, from which commissions must be deducted.

LEVERAGE 50:1

If we increase the leverage to 50:1, the trade size will also increase to €3754.96 and Petya can buy 0.42 bitcoins. Petya’s prepayment will be €93.87, the trading commission will be €2.81, the leverage fee will be -0.0100%, and the leverage itself will be €3661. With this amount of leverage and Petya’s funds, it will be necessary to set a guaranteed stop-loss – a tool that will not let you go into a minus. When it is triggered, a 0.5% commission is charged – but only when it is triggered.

Let’s focus on the same example, where bitcoin soon rose to €10,000. By selling his 0.42 bitcoins, Petya will receive €4200. From that, let’s subtract €3661 – what needs to be returned to the exchange. Petya is left with €539, of which Petya’s contribution is €93.87 and the trading commission is €2.81. Subtract the leverage and stop-loss commission, and we are left with about €440 of profit.

WHAT PETA NEEDS TO KEEP IN MIND

1) Margin trading on a crypto exchange can increase both profits and losses. If the value of bitcoin goes down, Petya’s losses will increase in the same way. Let’s say the bitcoin exchange rate falls to €5,000. With a leverage of 20:1 selling his 0.167 bitcoins, Petya will receive €835. We will deduct €1425 (this amount of leverage must be returned to the crypto exchange) and commissions. Including commissions, Petya’s losses will be more than €590.

2) Sudden market movement can affect current trades. Peta needs to look at the levels of capital to prepayment ratio:

If the prepayment level is above 100%, there is no need to deposit additional funds because Petit has enough funds to keep his positions open.

If the prepayment level drops to 80%, then Petit will receive a margin call.

If the prepayment level is 50% or lower, the platform can close Petya’s positions without warning until his margin account reaches approximately 80% of his capital again.

3) With only €100, Petya will not be able to buy 10 bitcoins even with leverage. Cryptocurrency trading allows leverage of up to 100:1. But with Petya’s contribution of €100 and a bitcoin value of €8931, a leverage of 100:1 will not be enough even to buy one bitcoin. Petya’s contribution should be more than €1000.

4) The leverage fee depends on the tokenized asset group.

5) Leverage fees are applied to leverage orders carried overnight according to market rates and are also charged on days when markets are closed. These fees are always clearly shown. In addition, leverage fees are charged every 8 hours in the case of ETH/USD, BTC/USD, ETH/EUR and BTC/EUR and every 24 hours in the case of other tokenized instruments.

6) Guaranteed stop-loss allows you to avoid unintended losses in case of volatile price changes. It excludes execution of the order at a price different from the value specified in the previously placed condition.

If Petya has set a guaranteed stop-loss and this condition is fulfilled, a commission is deducted from Petya’s account. Its size depends on the asset and is specified directly in the order editing window. The commission for executing a trade using leverage is included directly in the financial result of the trade.

7) The prepayment amount for the “Guaranteed Stop Loss” condition is calculated as follows:

Prepayment amount = Transaction volume / Leverage amount + Transaction volume * GSL Commission

Transaction volume = Quantity of asset * Price at order placement

8) In case of ETH/USD, BTC/USD, ETH/EUR and BTC/EUR and leverage size 1:50, 1:100, the guaranteed stop loss is set automatically and calculated according to the formula:

Prepayment amount = (Price at order placement – Price level) * Asset quantity + (Price at order placement * GSL Commission * Asset quantity)

9) P&L – profit or loss on incomplete transactions in the section “trading with leverage” (margin trading on the exchange) , is calculated as follows:

P&L = Quantity * (Current price – Trade price)

P&L of a wallet is equal to the sum of profit or loss on all current trades in this wallet.

10) If Petya buys tokenized bonds with leverage, he will receive full dividends on them. Dividends on tokenized assets are paid both when they are bought without and with leverage.

11) Suppose Petya does not know what margin trading in cryptocurrencies is. If Petya did not use leverage and traded only his €100, he would have bought 0.01119695 bitcoin. Petya’s profit when the coin rises to €10,000 would have only amounted to about €11 euros.

12) The difference between leveraged trading and regular trading for Petya is that in the first case he cannot withdraw the assets bought with the crypto exchange money or do whatever he wants with them – the “lender” will not allow him to do so. And in the second case, he owns all his money.

13) Trading with leverage on the platform, Petya can use wallets: USD.cx, EUR.cx, GBP.cx, BYN.cx, RUB.cx, BTC and ETH if he wants. To understand the terminology that you will have to deal with in this case, we have prepared a brief memo:

Funds are the balance of all completed transactions, as well as the amount of capital excluding P&L on pending trades in the Trading with Leverage section.

P&L is the profit or loss on uncompleted trades in Leverage Trading.

Capital = Funds + P&L. This indicator reflects the amount of deposited funds, (un)realized profit or loss minus commissions charged and withdrawals made.

Reserved is the amount of funds taken as a prepayment for any orders in the Trading with Leverage mode, as well as for limit orders in the Trading mode.

Available = Capital – Reserved. This is the amount of funds that are currently available for withdrawal.

Capital = Available + Reserved = Funds + P&L.

14) Leverage trading is a type of speculative cryptocurrency trading on a crypto exchange. Margin stock trading may differ from it only in the amount of leverage available. Currently, there are more than 5,100 cryptocurrencies (most of them non-competitive) and about 20,000 cryptocurrency exchanges. And while a year ago not even all major exchanges offered leverage trading, today it is increasingly difficult for them to compete without this service.

15) Trading with leverage is inherently riskier than regular trading. And when it comes to cryptocurrencies, the risks are even higher. This strategy is not suitable for beginners, and if you still want to try it, it is better to start with small bets. The ability to analyze charts, identify trends and determine entry and exit points will not eliminate the risks associated with margin trading, but it will help to better anticipate them.

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