Crypto Leverage and Shorting: The Definitive Guide [2021]

in #cryptocurrency2 years ago

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Margin trading is used in the cryptocurrency market of 2021 in a way that it has never been previously, with the growth of the popularity of margin trading over the past few years in particular leading to a huge percentage of all trades executed in the cryptocurrency market being done so using leveraging and shorting.

A large part of this transformation of the cryptocurrency market in recent years has been the increased sophistication of retail traders and their ability to use advanced tools and strategies to be able to interact with the cryptocurrency market in better ways, and one such way that this has manifested has been the growth in the comfortability that retail traders have with using margin trading in the crypto market.

In this guide, we’re taking a deeper look at crypto leveraging and shorting, the applications in the cryptocurrency market, and the benefits of using them, starting with a look at what cryptocurrency is as well as breaking down what crypto margin trading is, before moving on to look at why people use margin trading and whether or not it is risky, and then finishing up with a look at some of the best cryptocurrency margin trading platforms in the market in 2021 to use crypto leveraging and shorting.

Crypto 101

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What is Cryptocurrency?

Cryptos act as paper money in digital form and unlike most currencies are not backed by governments or physical assets like gold, as decentralized tokens of value, cryptocurrencies are transacted between wallets with no help from regulated banking systems thanks to their use of peer-to-peer technology.

Independent miners from around the world lend computing power to the blockchain network so user transactions are processed, when a transaction is fulfilled, the miner will be rewarded by the network for their contribution and will receive a payout in amounts that vary from one coin to another.

Crypto was merely an idea until the creator of Bitcoin made it public in 2009, other coins followed its release with more and more people launching alternative Bitcoin tokens of their own, these coins are known to industry experts as altcoins which is the name given to any coin that is not a Bitcoin.

Over six-thousand coins now exist and most have unique concepts that set them apart from competing coins, some are cheaper or faster to transact while others have smaller circulation supplies and greater valuations, controlling assets and transactions without a bank is a liberating experience that may soon be shared by us all if it becomes the currency of the future as many optimistically anticipate.

What is Blockchain?

Blockchain is a system that records information in ways that make hacking or cheating the system near impossible, it is a digital ledger of transactions that is duplicated and distributed across a vast network of computers running on the blockchain.

Blockchain was built on peer-to-peer topology and is a distributed ledger technology (DLT) allowing data to be stored on servers in all parts of the world, anyone on the network can view entries of others which would make it hard for one user to gain control of the network.

Many have tried to create a digital currency in the past though most failed due to trust as if someone creates a new currency it would be hard to trust its creator to not give themselves a million, however, Bitcoin quickly resolves this by using a special type of database known as the blockchain.

Blockchain is unique as no single person commands the network as it is run by thousands of computers, this prevents coins on the blockchain from being hacked or double-spent which gives people trust in its value and ability to grow.

What are the Advantages of Using Crypto?

Crypto is like paper money in the sense it can be exchanged for products and services or purchased as an investment for profit, crypto was created to give people a way to transact without the need for a central banking authority that can freeze assets or funds at any time.

Complete control of funds was in ways not possible until crypto released as these decentralized assets exist outside banking system control, this makes assets easier to manage and transactions cheaper but also allows users to avoid the sneaky fees charged by greedy and acquisitive institutions.

One advantage of crypto is that transactions are one-to-one affairs that take place over a peer-to-peer networking structure that cuts out the middlemen and their fees, audit trails are easier to establish as well and greater accountability can exist as both parties know exactly who they are transacting with.

Cryptos are more than coins of value as they are popular additions to the portfolios of investors around the world, strategically leveraging trends and volatility can amass short-term gains that stocks would be hard-pressed to match, and given they are decentralized, crypto markets never close and can be traded any time of day which is great for the fast-paced trader that enjoys round-the-clock trading sessions.

What is Crypto Margin Trading?

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What is Leverage?

Leverage trading which is also known as margin trading popularized in 2019 and became increasingly popular in crypto markets with its growth comparable to that of trading platforms that allow users to execute such trades, especially on exchanges that recently adapted their platform to incorporate it.

Leverage is when investors use borrowed liquidity to increase the value of open positions and as a result the profits and losses too, the term itself refers to how much a position is increased so if a 10x leverage is used it will increase a $1,000 investment to be as large and as profitable as a $10,000 stake.

Using this as an example the $1,000 is the margin and is held by lenders as collateral in case assets lose value and are sold, what makes leveraged trading attractive is that investors cannot lose more than the available margin which amounts to only a fraction of the potential profits earned from a winning trade.

Margin trading crypto allows investors to open both long and short positions which means they can profit from both rising and falling markets, once the value of the asset reaches the target price of the investors it will then be sold, and the price between the purchase and sell price is the profit.

What is Shorting?

Shorting is the practice of selling crypto with the hopes of it falling in value so it can be purchased for a lower price at a later date in order to profit from the spread, short-selling adopts the 'buy low, sell high' modality and reverses it as while traders buy low and sell high it is sold first and then purchased later.
It is important to consider investment goals before shorting to ensure it is a viable trade type, a majority of those that short have bearish views on its future as they believe it is a fad with hype-driven values.

With this view, it is imperative to stay in the loop on changes within the industry as there is much optimism surrounding the future of crypto and its underlying technology known as blockchain, although, there are plenty of people that short cryptos while still confident in its ability to grow over time.

As decentralized currencies, it is free from the influence of central banks and interest rates that impact fiat currency values though other factors capable of moving its price exist, these include the perception and supply of cryptos and the coins ability to be integrated and used in everyday life all of which should be considered before shorting a crypto-asset.

Why is Margin Trading So Popular?

Margin trading has become increasingly popular as it allows investors to leverage more buying power than they have access to which allows for greater profits to be earned assuming purchased assets are increasing in value following the purchase, margin trading amplifies gains but losses too so this should be done with caution.

Margin trading is a popular trading option for crypto enthusiasts as it allows them to borrow money against available funds to trade 'on margin' with the exchange, this can be done by either leveraging current holdings or with dollars and in some cases, interest is added to borrowed amounts though this varies from lender to lender and exchange to exchange.

With fifty dollars on a 10:1 leverage you borrow $450 to purchase $500 in crypto with the requirement to reimburse the exchange the borrowed amount plus fees, lenders ensure loan amounts are repaid by liquidating the assets if it drops in price and starts to eat away at borrowed funds which can be stopped by injecting more cash into the position.

Leveraging options vary from one exchange to the next and can be done by shorting a crypto if you believe its price will drop or by longing one if confident its price will rise, some of the most popular platforms to margin trade crypto include PrimeXBT, Kraken, Binance, Bitmex, Bitfinex, and FTX.

Why Do People Use Margin Trading?

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Reduce Risk

Risk management is important for investments into assets of all types but given the volatility of crypto it is imperative to reduce risks when possible, aside from the gains margin trades can generate its ability to limit losses is another reason it has become widely popular crypto traders.

Margin trading is a way to reap the profits of larger liquidity purchases for a fractional up-front cost and is also a risk-reduction strategy as it limits how much can be lost on a trade given that vested assets are sold by the exchange once losses exceed investor funds.

Stop-loss is required for risk control when trading on margin as it acts as a preventative barrier that reduces the risk of losing more than what can be afforded, these trades are made and then sold when it is no longer viable to have open in order to prevent continued losses.

Market signals should always be monitored and if a trade begins to drop down in value should not be held as there is no reason to keep a trade open if confidence in its success no longer remains, trade with care at all times so profits increase and losses diminish.

Trade on Drops in Price

Investing in a crypto when its price begins to drop is a popular and trending investment strategy with crypto investors that is sometimes referred to as ‘buying the dip’, this should be done when prices are dropping or when you believe an asset is soon going to rebound from its decline.

Using the ‘buy low and sell high’ mentality this trade type is the technique of purchasing assets once its price declines to sell at a higher rate at a later date, this allows investors to profit from the spread or the difference in the price they paid and the cost they sold.

Margin trading assets with drops in price is good for the possible gains that can be earned but also because positions can be exercised using account securities or collateral, this means you can avoid selling securities and incurring capital gains or prevent available cash from being used up.

Margin trading confers greater profits than traditional trading though it can amplify losses too in the event traded assets decline in value, if it drops more than the margin then brokers issue margin calls that require positions to be liquidated or the investor to add more cash into the investment.

Maximise Profits on Successful Trades

Margin trades allow investors to leverage amounts of funds in amounts that exceed available cash holdings which can amplify earned profits, some platforms allow an investor with $1,000 to enjoy leveraging the power and returns of an investment a hundred times greater in size.

Compared to traditional trades where an investor with a thousand dollars can only leverage available cash to purchase assets that same thousand dollars can be risked but in a trade whose gains can be amplified many times over.

Maximizing profits from margin trading requires an understanding of market conditions as while the trade type itself permits greater profits to be reaped is best achievable when its market is understood, to be profitable margin trading it is a must to study its past and recent valuations and buyer trends.

While profits can be amplified the losses can be too which is why studying the market is important as it will give traders better insight on potential growth, margin trading is a good way to reap greater profits from larger positions that require only fractional amounts to be invested up-front and is a viable method for fund-limited traders who believe an asset’s value will grow based on its data.

Is Using Shorting and Leverage Risky?

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The Misconception That Margin Trading is Risky

Despite margin trades being viewed by many as risky, it does have its benefits and conveniences when responsibly leveraged, from limiting potential losses to greater profits there are a number of alluring perks this trading type offers and is useful to inform traders opening data-guided positions.

Trading on margin means that a loan is taken from a broker-dealer and then used to execute trades on an asset whose ownership remains with the dealer at all times, the most an investor can borrow for purchases is fifty-percent per federal regulations.

One perk of margin trading is that investors can borrow against assets for even non-trading purposes which is helpful if needing funds for personal expenses without the hassle of a credit check, not only that but margin account interest rates are usually much lower compared to other lending options such as credit cards or home equity lines of credit.

Investors using margin can also trade more shares in value than their available cash which can be leveraged to either short or long an asset, successfully executed and the greater market exposure margin trades bring can provide margin traders with much higher returns.

Effective Risk Mitigation is the Key

Margin trading allows people to make trades with deposits that amount to only a fraction of the total trade amount which lets fund-strapped buyers enjoy greater earnings on trades whose values increase, the more that is invested the greater returns and losses become though this allows risk to be mitigated in that declining assets can prevent investors from losing more than what they put in.

Despite the potential gains investors should consider that many equity lenders borrow roughly half the value of trades which means gains or losses can be multiplied by the invested amount plus fifty percent, learning the rules of a lender if part of risk mitigation as their stipulations can either make or break a margin trading strategy.

Risk mitigation begins with investing funds that can be afforded to lose as volatility can cause even the most seasoned of traders to be in the red on a margin trade, leveraging cash holdings to margin can of course reap amplified gains that otherwise would not be had in traditional investments but should only be executed responsibly.

All traders know to fear the swift and unforeseen price movements that can very quickly turn profitable trades into losing one’s which may occur when big investors open or close positions or when a relevant and recent news flash development emerges, predicting such changes is nearly impossible which is why ‘stop orders’ should be used to mitigate the risk of losing too much.

Finding Platforms with Professional Margin Trading Tools Reduces Risk

Margin trading allows investors to open positions in amounts greater than the cash they have access to and when leveraged strategically can yield impressive gains, there are many platforms that allow their users to trade on margin and the ones with advanced tools are most suitable.

Compared to spot trading which is when available cash is used to purchase assets directly on a trading account, margin trading will give users access to greater capital and potential profits and can be started in minutes by creating a margin account and then transferring collateral to it and a suite of available trading tools lets investors speculate valuations with greater confidence.

There are exchanges letting users margin trade with leverage which works for any asset pair having USD as its base currency, having advanced trading tools and high liquidity that enables them to offer sophisticated margin orders it is now one of the most used platforms to margin trade on.

Best Crypto Margin Trading Platforms

PrimeXBT

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PrimeXBT is the largest multi-asset margin trading platform in the world, meaning that there are advanced margin trading tools provided by the platform across a range of asset classes that include cryptocurrencies, but also many of the world's leading traditional assets as well.

In fact users at PrimeXBT are able to access up to 100% one 100X leverage on a range of cryptocurrencies including examples, as well as up to 500X leverage on a range of the world's leading traditional assets like stock indices such as examples, for expense such as examples, and commodities such as examples.

PrimeXBT's growth has been exponential since its launch in early 2018, and over the past years PrimeXBT has provided industry-leading margin trading solutions that have seen its trade volumes growth rate to having up to $7 billion of global trade pass through its doors each and every day.

PrimeXBT has forged a reputation for being a leader in the cryptocurrency margin trading space and while a number of major crypto margin trading platforms have suffered huge losses in users and trade volume of the past few years such as Bitmex, PrimeXBT's growth has continued to match the levels of innovation that it has brought to the cryptocurrency market over the past years.

PrimeXBT also provides the lowest fees of any major cryptocurrency trading platform on the market with a low flat rate of 0.05% being applied to all trades irrespective of the size of the trade of the asset class trip being traded, and this has further cemented PrimeXBT's place as the world's leading crypto margin trading platform.

Binance

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Binance is a trading platform with over many coins that can be margin traded, ETH is one of the most popular to be margin traded which Binance makes easy to do given that they let users move holdings to margin accounts to be secured as collateral or can fund using credit/debit or wire transfers too.

Binance is known for competitive rates and ease of access as they have one of the easiest investment processes for both beginners and seasoned investors, margin trades can be executed from users of nearly any country and they receive positive reviews consistently from their active trader base of over thirty million users.

Binance recently partnered up with other companies to extend better service which includes the ability to fund margin accounts using more funding sources than previously allowed and at lower rates, stellar support and advanced trading tools have made them a margin-favorite trading platform for many.

Offering trading tools that allow investors to turn speculation into considerable profits they are a viable choice for any investor wanting to leverage small liquidity pools for maximized gains, they let customers margin trade many coins, including Bitcoin and Ethereum, and offer Futures trading too which let users leverage up to 125x which on winning trades can deliver users staggering returns.

Kraken

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Kraken is a user-friendly margin trading platform for both new and seasoned traders and is among the safest of any exchange as they are not only regulated by U.S. law but are registered and license as well, with bank-grade security measures and stellar customer support and trading tools that allow let traders profit from a variety of market conditions has grown in popularity among margin trader hopefuls.

With access to an ever-growing suite of margin trading tools allowing investors to make informed speculations comes the ability to reap greater profits too, and with over a billion dollars in daily trading volumes supported by users in one of the 48 states and 176 countries they support is a high-liquidity exchange capable of catering to the needs of margin traders at affordable rates.

Diverse in their offerings they give customers much more than the ability to trade coins as they allow users to margin trade assets up to 5x leverage that enables investors to amplify earned profits, with a 5x leverage its users are able to open $10,000 positions for as little $2,000 which means fractional-funded trades can earn the gains of larger-staked liquidities.

Given their variety of trading tools and expansive pool of tradable assets secured by the FDIC regulatory compliance protocols they follow, Kraken is a great choice for investors wanting to margin trade with a platform whose reputation is just as great as their market liquidity, which matters as greater liquidity is often tied to lower fees that allow users to retain greater margins of profit.

What are the Best Ways to Use Crypto Leverage?

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Leverage Trades with High Likelihood of Success

Potential losses are possible no matter the asset or market so it is imperative to conduct due diligence on the traded asset and its past and current movement so informed speculations can be made, while margin trading can amplify profits the same goes for losses too so trading coins with greater potential is immensely important.

Given the volatility crypto is known for it is profit-essential that prospective assets are thoroughly and properly researched with daily trading volumes and news surrounding the asset being assessed, cryptos such as Bitcoin and Ethereum that have high trading volumes and positive outlooks are samples of what may constitute worthwhile assets to margin trade.

One way to determine an asset’s potential for growth and its odds of returning profits is to assess its lowest and highest twelve-month price which allows investors to gauge if their entry point makes sense, a coin with a one-year low of a dollar and a high of two dollars would not be wise to long if its value has a two-month average of $1.90 as the two-dollar mark is what is known to insiders as its resistance level.

Staying involved in crypto-trading communities and being in the loop on current/future developments is a great way to prospect the likelihood of a successful investment, these online resources are great ways to see the opinions and investments of others and can improve a traders ability to make wise trades that otherwise may not have been made.

Leverage Trade Flat Trends

Flat is the term used in the securities market to describe a stagnant price that neither rises or falls and assets not accruing interest are often referred to as flat, in some markets it is the condition of not being long or short which many refer to as 'being square'.

While flat trends can have their drawbacks one of their greatest advantages over other trading types is that they can be used to produce profits in markets with little movement, trading on high movements can be lucrative but markets do not always have such large swings which means flat trends can be used to earn gains that other trade types would be unable to produce in slow-moving markets.

Trading flat markets can be tricky and on the surface may seem pointless to an investor that sees little reason to take a position where little volatility that creates opportunities exist, the interesting thing of trading flat trends is that profits largely come from predicting that it will remain flat.

Flat markets can fluctuate through their peaks often occur during set and smaller time frames during which high and low prices are met which lets traders leverage small spreads for minimal but consistent profits, success with flat trends requires high and low prices to be tracked so boundaries and patterns can be defined for future flat-trade investments.

What are the Best Ways to Use Crypto Shorting?

Shorting Pumps

Pumps refer to an asset’s value quickly rising due to hype and not a change to its technology and this in some cases is referred to as a bull run though pumps are more short-sighted gains, pumped assets and especially cryptocurrencies are notorious for being pumped though often sharply fall in value.

Shorting is the word used to describe investments that are made based on the speculation that an asset will fall in value, when shorting a cryptocurrency you believe its value will decline and if correct will earn profits from the spread between the purchase and sale price.

Shorted assets that rise in value can cause losses its value rises which is why cryptos having unlimited circulating supplies should never be shorted as they can be infinitely inflated, pumps are great ways for investors to capitalize on hype-driven valuations that more times than not will quickly fall once investors liquidate holdings to secure gains.

Entry points can make or break a short position and assets should be shorted when the investor believes its current price is at or near the peak as any decline in value will begin to work against the positions and eat away at profits, shorting pumps should be done with caution and care and as always with funds that are able to be lost.

Using Shorting with Longs for Hedging

A short hedge is an investment strategy used to protect (hedge) against the risk of an asset’s declining price in the future and is commonly used among crypto investors wanting to mitigate the risks of coins they buy or sell, a short hedge involves shorting a crypto or using derivative contracts that hedge against possible losses by selling owned assets at predefined prices.

This trading strategy helps to protect investors and traders against declining prices and is used by traders already in a long position to short an asset, some use this technique to secure known selling prices today so future fluctuations do not impact current holdings.

The idea here is to invest in coins whose founding company has attractive investment and long-term growth potential (longs) which is a wise bet for those believing values will rise but shorting overvalued or unattractive assets (shorts) can be just as profitable too when skillfully done.

This investment strategy is pursued mostly by hedge funds and is all about winning or losing and is best for seasoned investors having experience and long-sighted ambitions, the goal is to discover long assets backed by companies that are going long and to short those with little potential.

In Summary: Crypto Leverage and Shorting

Leveraging and shorting out two of the most powerful you will tools at the disposal of cryptocurrency traders in 2021, and although the standard of margin trading services that were once available in the crypto market were very basic and limited, today there are a number of platforms that provide advanced world-class margin trading services to cryptocurrency users around the world.

PrimeXBT, Binance, and Kraken are three platforms that provide the best margin trading services in the cryptocurrency space and are widely recognized as being the best platforms to use margin trading in order to gain an advantage over the rest of the market with leveraging and shorting cryptocurrencies.

Find out more about these platforms and the margin trading tools that they provide by checking out PrimeXBT, Binance, and Kraken.

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