You can make money in crypto or any other asset or commodity by buying at a certain price and selling at a higher price. Buy at $1 and sell at $2 and you’ve doubled your money. These prices are called “spot” prices.
You can also make money when the price of an asset decreases. This is done by trading in “futures markets” where you are trading the “future” price of the asset to be lower than it currently is. This is also known as “shorting”.
There is another type of trading called “leverage trading” which enables traders to make trades of a higher value than they wish to stake with their own cash. For example, I may have $100 in my trading account, however depending on the trading platform I may be able to execute trades up to $10,000 by using 100x leverage ($100 * 100x leverage = $10,000).
If Bitcoin is trading at $10,000 (I wish!), and I only have $100 in my account, I can actually “bet” on the price of a full Bitcoin to either increase or decrease in price by “longing” (betting on the price to increase), or “shorting” (betting on the price to decrease) with 100x leverage.
To illustrate the above:
if I had $200 in my account I could long or short a full $10,000 Bitcoin with 50x leverage or up to two $10,000 Bitcoins using 100x leverage.
if I had $1,000 in my account I could long or short a $10,000 Bitcoin using 10x leverage, or ten $10,000 Bitcoins using 100x leverage.
Why would you trade using leverage? Because it allows you to earn up to 100 times more on your investment than you would otherwise be able to.
Use the above example again and we will compare spot trading with leverage trading to see the difference:
Spot trading
If I have $100 in my account and Bitcoin is trading at $10,000, I can physically purchase 0.01BTC. To double my money, I would need Bitcoin to reach $20,000 before selling, at which point I would have $200 which is a 50% return on investment (ROI).
Leverage trading
The way to calculate your return on investment from trading with leverage is to multiply the percentage increase or decrease between the entry and exit point of the trade, and multiply by the amount of leverage being used.
As above, if Bitcoin is bought at $10,000 and sold at $20,000 there is a 50% increase in price:
50% * 100 leverage = 5,000% ROI, or $5,000 if I have staked $100.
Let’s use another example to see how profits can be amplified using leverage:
Let’s say we have $2,500 in our account and ETH is trading at $2,500.
I can trade $5,000 worth of ETH using 2x leverage.
Let’s use this example when SHORTING ETH.
Let’s say we have shorted $5,000 worth of ETH using 2x leverage, meaning we have staked our full $2,500 trading account.
If the price of ETH drops $250 to $2,250 (10% drop in price), we would have made $500:
10% * 2x leverage = 20%
20% of $2,500 = $500.
Why NOT to trade using leverage
Whilst profits can be amplified when trading with leverage, the mathematics also work in reverse.
Let’s use the above examples again:
If Bitcoin is trading at $10,000 and I have $100 in my account, and I decide to long Bitcoin using 100x leverage, I only need the price to move against me 1% (drop to $9,900) in order to lose my entire $100. Again, 100x leverage x -1% = -100% ROI.
Using the ETH example, if I have shorted $5,000 worth of ETH ($2,500 using 2x leverage), I would lose my full $2,500 if the price INCREASED by $1,250 to $3,750 (because $1,250 is 50% of $2,500 and 50% * 2x leverage = 100%.
DISCLAIMER – Leverage trading is only for experienced traders. The amount of knowledge required to be successful when trading with leverage takes years to accumulate and includers factors such as:
Position sizing
Risk management
Technical analysis
Chart patterns
…and way more.
If you are interested in becoming a leverage trader, you should first begin by finding a suitably qualified coach or mentor and secondly by only trading using accounts which allow you to practice using fake money so you can learn how to do it properly.
About Me
I’m Jamie, 35 years old and living in Australia. I got into cryptocurrency in 2018 shortly before the $20k high and subsequent bear market, and when you could buy 1 ETH for $300 (my first investment). Since then I have dabbled in most things crypto-related: leverage trading, minting and selling NFT’s, ICO’s… I’ve been scammed (several times), attempted various trading strategies (from hodling to 100x’ing a trade) and introduced many people to crypto.