Leverage trading in the cryptocurrency market allows traders to amplify their potential gains—and their potential losses. It involves borrowing funds to increase the size of a position beyond what would be possible using only one’s own capital.
In this guide, we’ll explore how leverage trading works, the types of borrowing available, interest calculation, and essential risk management practices.
What Is Leverage Trading?
Leverage trading refers to using borrowed funds to open larger trading positions. By using assets in your account as collateral, you can borrow additional cryptocurrency to trade with higher exposure.
Most platforms allow users to trade with up to 10x leverage, meaning a trader can control a position ten times larger than their initial capital. This applies to both long (buy) and short (sell) strategies. Leverage is available in various account modes, including spot, cross-margin, and portfolio margin.
How Borrowing Works
Market Borrowing
When you enter a leveraged trade, you borrow funds from a market lending pool. These pools are typically funded by other users who deposit their assets into lending programs to earn interest.
The amount you can borrow depends on several factors:
- Your user level and corresponding borrowing limit.
- The specific cryptocurrency’s tiered borrowing structure.
- The available liquidity in the lending pool.
You can repay borrowed funds by either buying back the owed cryptocurrency or transferring it directly into your account, depending on your account mode.
VIP Borrowing
Eligible users may also qualify for VIP borrowing services, which can offer more favorable terms. In certain cases, VIP loans can be converted into standard market borrowing. Specific rules regarding VIP borrowing and repayment vary by platform.
Interest Calculation
Interest is calculated separately for isolated and cross-margin positions. A common practice is "interest-first repayment," meaning when you repay a loan, the interest is settled before the principal.
Interest is typically recorded hourly, based on the outstanding borrowed amount. The calculation often includes a brief settlement period (e.g., 10 minutes). New debts incurred within that period may also be included in the interest calculation.
For example:
- If you borrow at 10:55 PM, interest is calculated and deducted at 11:00 PM.
- If you repay the loan at 10:57 PM, no interest is charged.
It's essential to understand the specific interest rules on your chosen platform.
Auto-Conversion
In certain situations, an automatic conversion may be triggered at either the user or platform level. This process uses positive balances to buy back owed cryptocurrencies, thereby reducing outstanding debt. This is often a risk management feature to prevent liquidation.
Tiered Leverage Rules
Leverage platforms often use a tiered system where each level has different:
- Maximum borrowable amount.
- Maximum allowed leverage.
- Maintenance margin requirement.
Higher leverage levels usually mean lower maximum borrowable amounts. So, even if you have significant available capital, selecting very high leverage might actually reduce your borrowing capacity compared to a lower leverage setting.
👉 Explore advanced borrowing strategies
Risk Management in Leverage Trading
Using higher leverage or borrowing large amounts increases your risk level and the chance of triggering risk control mechanisms.
Common risk indicators include:
- Margin Call Warning: When your margin ratio falls below a certain threshold (e.g., 300%), you may receive a warning to reduce your position.
- Liquidation: If your margin ratio drops to or below 100%, the platform may automatically reduce your position or liquidate it entirely to prevent further losses.
Liquidation rules can vary based on your assets, liabilities, and the specific account mode you are using.
Frequently Asked Questions
What is leverage trading?
Leverage trading allows you to borrow funds to open larger positions than your current capital would allow. It magnifies both potential profits and losses.
How is interest calculated on borrowed funds?
Interest is usually calculated hourly on the amount you've borrowed. There is often a short settlement window, and repayment within that window may avoid interest charges.
What happens if my position is liquidated?
If your margin ratio falls to the liquidation threshold, the platform will automatically close your position to prevent further losses. This can result in a total loss of your initial collateral.
What is the difference between isolated and cross-margin?
In isolated margin, the risk is contained to a specific position and its allocated collateral. In cross-margin, your entire account balance may be used as collateral for open positions.
Can I avoid liquidation?
You can avoid liquidation by maintaining a sufficient margin level, either by adding more collateral to your position or by reducing your exposure before the margin ratio becomes critical.
Is leverage trading suitable for beginners?
Leverage trading carries significant risk and is generally not recommended for beginners. It requires a solid understanding of market analysis and risk management techniques.
This article is for informational purposes only and is not intended to provide any investment, tax, or legal advice. It should not be considered an offer to buy, sell, hold, or provide any services related to digital assets. We do not guarantee the accuracy, completeness, or usefulness of this information.
Holding digital assets (including stablecoins) involves high risk, and their value may fluctuate significantly—they could even become worthless. Leveraged trading amplifies both potential gains and potential losses and may result in the loss of your entire investment. Past performance is not indicative of future results.
You should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation, especially when considering the use of leverage. You are solely responsible for your trading strategies and decisions.