Ethereum Leverage Trading

Margin trading is a trading strategy that requires less capital to invest while reaping huge profits compared to other cryptocurrency trading strategies. Thus this is becoming very popular amongst traders.

While trading Ethereum with margin, the traders will invest a portion of the price of Ethereum, and the rest of the price is borrowed from the cryptocurrency broker or firm.

For example, the price of Ethereum is trending at $1,000, and the margin money required for entering the market is also $1000, but the trader has limited funds and wishes to trade Ethereum.

Here comes the cryptocurrency broker or the firm. First, the broking firm or the broker allows the trader to trade by entering through margin trading. For example, suppose the broker asks for 45% of the minimum margin money to enter the trade while the broker loans the remaining money to that trader.

So when Ethereum is trending at $1,000, the trader enters into margin trading with 45%, i.e., $450, while the broker loans the trader $550.

The trader is now exposed to the risk of the underlying asset and can trade easily. The chances of profit and loss are dependent on the research done by the trader to anticipate the price movement of Ethereum.

This strategy is generally used when the price trend of Ethereum is bullish for a short period, and the trader who wishes to enter the market and exploit the situation has little money to invest.

Benefits of Trading Ethereum

Ethereum is the second most ranked cryptocurrency after Bitcoin in market capitalization. The average daily trading volume of Ethereum is roughly $35 billion, thus making it pretty liquid while trading. In addition, most DeFi applications are built on the Ethereum platform and continue to do so. Thus the popularity of Ethereum continues to grow.

Since Ethereum is a cryptocurrency, the crypto market is known to be open throughout the year 24X7, including public holidays. As a result, traders can learn a lot about the current trends in token movements and Ethereum itself through Ethereum block explorers. Additionally, it is possible to forecast and estimate changes in the price of Ethereum that a shortage of network resources might bring on by a high demand for complicated applications.

Trading Ethereum with leverage

Another popular trading strategy is Ethereum leverage trading. Instead of owning the underlying asset, the traders can trade on the underlying asset’s price.

Leverage is a tool that can magnify the profit when used correctly or can also magnify loss if the trader does not interpret the market sentiments.

You can open both long and short positions while using leverage. For example, you would wish to opt for a long position if you expect the price of Ethereum will go up. Similarly, you will go short if the price of Ethereum is falling. While this could appear to be typical spot trading, using leverage enables you to purchase or sell assets based solely on your collateral and not your holdings. Thus regardless of whether you own the underlying asset or not, you have the option of borrowing and selling it if, as per your research, the market falls.

What is leverage in crypto trading?

Using borrowed capital to make trades is called leverage in cryptocurrency trading. Leverage allows you to trade in larger volumes by magnifying your buying and selling power; thus, with small capital, you have the opportunity to make more money. However, leverages are double-edged swords, as they provide you the opportunity to amplify your profits. On the other hand, you are at the risk of substantial loss if you misinterpret the market sentiments.

How does leveraged trading work?

Before you start ethereum leverage trading with leverages and borrow funds, you must have funds in your trading account. The initial capital provided by you is called collateral. The initial capital varies depending upon the leverage and the total value of the position you wish to open, known as margin.

For example, if you wish to invest $1,000 in Ethereum (ETH) and leverage 10X, the margin required would be 1/10 of $1,000. In other words, you need to keep $100 as collateral for the borrowed funds. On the other hand, if you opt for 20X leverage, the margin would be lower than 1/20 of $1,000 is $50. However, the chance of being liquidated increases with leverage.

It would help if you also had a margin threshold for your trades and the initial margin deposit. As the market swings against your position, the margin falls below the maintenance threshold; as a result, you must add more money to your account to keep it from being liquidated. The threshold may also be referred to as the maintenance margin.

While applying leverage, positions can be opened on both the long and short sides. If you think the price of ethereum will increase, you should choose a long position. The same applies if Ethereum’s price declines—you would go short. While it can seem like standard spot trading, applying leverage allows you to buy or sell assets based only on your collateral rather than your holdings. Because of this, whether you own the underlying asset or not, you have the choice to borrow it and sell it if, as predicted by your study, the market declines.

Example of a leveraged long position

Suppose you wish to open up a long position of $1,000 worth of Ethereum with 10X leverage; in other words, you will require $100 as collateral. If the price of Ethereum goes up by 20%, you will earn $200 as a net profit after deducting fees, which is higher than earning $20 if you traded only $1,000 capital without using leverage.

However, had the price dropped by 20%, you would make $200 as a loss. But since you have kept $100 as collateral, the drop would cause a liquidation, or in other words, your balance would go zero. So even if the drop had been 10% down, you still would have lost your $100. Thus depending upon the exchange, you are using the exact liquidation value would depend.

Thus it is advisable to add more funds to your account, increasing collateral. Generally, a margin call would be sent by the exchange before liquidation happens.

Example of a leveraged short position

Now consider that you wish to open a $1,000 short position with 10X leverage; again, you would be borrowing Ethereum from someone else and selling them at the current market price. Your collateral is $100, and as you are trading on 10X leverage, then you are in a position to sell $1,000.

However, the current price of Ethereum is $4,000, and you have borrowed 0.25 ETH and sold it. If the price of Ethereum drops to 20%, that is $3,200; then you can buy back 0.25 ETH with just $800 giving you a net profit after deducting the fees of roughly $200.

But if Ethereum rises 20% to $4,800, you will need an extra $200 to buy back the 0.25 ETH. since you hold only $100 as collateral, it will get liquidated. Thus it is essential to maintain reasonable funds in your account.