What does cryptocurrency leverage mean?
In fact, leveraged trading is about using small amounts to control larger amounts, thereby increasing the return on investment (profit or loss). Leverage can also refer to borrowing, using borrowed funds for investment, paying a small amount of interest, but potentially earning high returns through investment; this effect of borrowing is called leverage effect.
The leveraged trading in the cryptocurrency space is essentially the same as that in the stock market; it is a derivative financial instrument of spot trading in the cryptocurrency space.
In everyday life, for example, when taking out a bank loan to buy a house, you pay a 20% down payment. If the house is worth one million, you spend two hundred thousand to buy it, and the bank lends you eight hundred thousand. This is essentially a five-fold leverage, using a relatively small amount of capital to leverage a larger value, which is also known as leverage.
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Leveraged trading can be divided into spot leverage and futures leverage. The role of leverage is to magnify investors' profits and losses. In futures contract trading, there is a margin system, and leverage is the inverse of the margin ratio, meaning that investors do not need to pay the full amount but only a small margin according to a certain ratio to participate in buying and selling. A 10x leverage means a 10% margin ratio, while a 100x leverage means a 1% margin ratio.
For example, if I have ten thousand yuan, I can buy futures contracts worth one hundred thousand yuan, which is also a frequently mentioned leverage principle in futures. The amount of margin is related to the amount of margin used; the greater the leverage, the smaller the margin, and vice versa.
The essence of spot leverage is to expand the principal through collateralized borrowing, thereby magnifying profits and losses. Spot leverage and futures contract leverage are two completely different trading systems; simply put, spot leverage magnifies the principal, while futures contract leverage magnifies price fluctuations.
Cryptocurrency leveraged trading rules.
1. Asset related.
1. Total assets of the leveraged account: The total amount of cryptocurrency in the leveraged account, including available assets + frozen assets.
2. Transferred assets: Cryptocurrency transferred from the cryptocurrency account to the leveraged account through asset allocation.
3. Raised fund assets: The cryptocurrency used as collateral for raising funds.
4. Available assets: The assets in the leveraged account that can be used to place orders, including a portion of transferred and raised funds.
5. Frozen assets: Assets in the leveraged account that cannot be used to place orders.
2. Leverage related.
1. Maximum Borrowing: Refers to the maximum borrowing limit for the current cryptocurrency pair; currently, the maximum leverage multiple is 3 times.
2. Maximum Borrowing Calculation: Maximum borrowable = (Total account assets - Unpaid raised fund assets - Unpaid loan interest) * (Maximum leverage multiple - 1) - Unpaid raised fund assets.
3. Risk rate and liquidation related
1. Risk Rate: An indicator that assesses the liquidation risk of the leveraged account. When the risk rate ≥150%, a portion of unnecessary assets in the account can be transferred out by asset allocation; when the risk rate ≤130%, the risk rate is assessed as risky, and the system will send notifications and emails to the user; when the risk rate ≤110%, the system will force liquidation and notify the user via messages and emails.
2. Risk Rate Calculation Method: Risk Rate = [(Total charging cryptocurrency assets - Unpaid loan interest on charging cryptocurrency) / New selling price + (Total trading cryptocurrency assets - Unpaid loan interest on trading cryptocurrency)] / (Charging cryptocurrency raised fund assets / New selling price + Trading cryptocurrency raised fund assets) * 100%.
3. Liquidation: When the risk rate of a leveraged account for a certain cryptocurrency is ≤110%, the system will execute a liquidation operation, using all assets in the account to repay the borrowed cryptocurrency liabilities.
4. Liquidation risk rate: Liquidation risk rate = 110%.
5. Liquidation price: In DragonEx, each borrowed cryptocurrency must pay a certain percentage of collateral. When the market undergoes unfavorable changes, for example, when there is a significant market reversal, and the current total assets of the leveraged account depreciate to a certain extent, the system will forcibly sell off the assets of that leveraged account at the best market price to settle the borrowed cryptocurrency and its interest.
6. Liquidation price calculation method: Liquidation price = (charging cryptocurrency raised fund assets * liquidation risk rate + unpaid loan interest on charging cryptocurrency - total charging cryptocurrency assets) / (total trading cryptocurrency assets - unpaid loan interest on trading cryptocurrency - trading cryptocurrency raised fund assets * liquidation risk rate).
4. Loan interest and repayment.
1. Interest Payment Standard: Each borrowed cryptocurrency order pays interest separately. Interest is paid for the first time when the borrowing is successful, and then paid once every twenty-four hours thereafter.
2. Repayment Standard: Prioritize repaying the originally converted borrowed cryptocurrency orders. Prioritize repaying interest on loans before repaying the principal. Once the principal and interest of each borrowed cryptocurrency order are fully settled, each order will be marked as settled, and thereafter, no interest will be paid on that order.
However, leveraged trading is not without risks. If the market trend goes against the investor's expectations, losses can also be magnified. For example, at the aforementioned leverage ratio, if the value of the cryptocurrency drops by 10%, the investor would not only lose 1,000 yuan of principal but may also face the risk of forced liquidation. Therefore, understanding the rules and operational methods of leveraged trading is crucial for every participant.
First, we need to understand the basic rules of leveraged trading. Most trading platforms set a maximum leverage ratio, usually between 1:2 and 1:100. Choosing an appropriate leverage multiple is the first hurdle every investor must face. While high leverage can bring higher returns, it also means greater risks. Therefore, when selecting a leverage multiple, investors should consider their risk tolerance and the volatility of the market.
Secondly, the concept of margin is also crucial. Margin is the amount of money that an investor must deposit into the trading account before engaging in leveraged trading. This amount is usually a portion of the total value of the assets being traded, serving as a 'deposit' for the trade. If market conditions are unfavorable and the account balance falls below the maintenance margin level, the trading platform will enforce a forced liquidation to avoid greater losses. Therefore, managing margin wisely is one of the key strategies to avoid losses.
After understanding the basic rules of leveraged trading, mastering specific operational methods is equally important. First, investors need to choose a reliable trading platform. There are many cryptocurrency exchanges in the current market, and investors should pay attention to the platform's security, fees, variety of trading pairs, and customer service when making their selections. Well-known trading platforms such as Binance, Coinbase, and Huobi offer various leveraged trading options.
Next, investors need to open a trading account and complete identity verification. After registration, investors can deposit funds into their accounts and then choose an appropriate leverage multiple for trading. When placing an order, investors need to choose between a limit order or a market order. A limit order allows investors to set the price at which they want to execute a trade, while a market order executes immediately at the current market price.
When engaging in leveraged trading, investors must also keep a close eye on market dynamics. The cryptocurrency market is highly volatile, and prices change rapidly, so it is crucial to stay updated on market information and technical analysis. Investors can obtain the latest market insights by reading relevant market analysis reports, participating in community discussions, or following professional financial media.
In practical operations, risk management is a skill that every successful investor must master. Setting stop-loss orders is an effective way to control risk. A stop-loss order can help investors automatically sell assets when prices reach a set loss threshold, thereby avoiding greater losses. In addition, diversifying investments is also an effective strategy to reduce risk. Investors can diversify their investments across multiple cryptocurrencies rather than concentrating all funds on a single asset.
In addition to the aforementioned methods, psychological factors in leveraged trading cannot be ignored. Market fluctuations often trigger emotional swings in investors, leading to irrational decisions. Therefore, maintaining a calm mind and following a set trading strategy is key to successfully conducting leveraged trading.
With the development of the cryptocurrency market, more and more investors are beginning to try leveraged trading. However, many people often overlook the potential risks while pursuing high returns. This is why education and training are particularly important. Many trading platforms offer simulated trading functions, allowing investors to practice trading skills and familiarize themselves with market dynamics in a risk-free environment.
In summarizing the rules and operational methods of cryptocurrency leveraged trading, we might reflect on why so many people choose this trading method. The allure of leveraged trading lies in its potential for high returns, but at the same time, the risks cannot be underestimated. Investors must remain rational in their pursuit of wealth growth to remain invincible amid market fluctuations.
In the future, as technology advances and the market matures, the rules and operational methods of cryptocurrency leveraged trading may further evolve. Investors need to continuously learn new knowledge and adapt to market changes to establish themselves in this field full of opportunities and challenges.
In summary, cryptocurrency leveraged trading offers investors a wealth of opportunities but also comes with significant risks. Before engaging in leveraged trading, it is crucial to thoroughly understand the relevant rules and operational methods, manage risks effectively, and maintain rationality—these are topics every investor should keep in mind. Only with sufficient preparation can one achieve steady growth of assets in this volatile market.