- Leverage trading can appear to be a quick and easy way to make a big win
- Crypto Twitter is bursting with alleged profits from a single, high leverage trade
- Most traders should avoid the lure of leverage trading
Leverage trading is easier to access than ever in the crypto world, and it doesn’t help that crypto Twitter is filled with traders posting huge profits on their feeds. However, these kinds of gains are only repeatable after years of training and experience. For the average crypto trader, and especially for newcomers, there are several reasons why you should avoid leverage trading like the plague, and here are our top three.
The Potential to Lose Your Money
With regular trading, or indeed irregular buying, holding, and selling, when you sell your coins you get something back, even if you sell at a loss. This gives you the opportunity to get it back. With leverage trading however there is the potential to get liquidated and lose your entire account. Yes, there’s the thrill of potentially doubling your account as well, which is what makes people throw the kitchen sink at a trade, but the market could easily turn against you and you could end up losing everything inside a few minutes.
Leverage trading is appealing because of the profit potential, but unless you have years of training to fall back on, the likelihood of being liquidated is extremely high, at least in the first few months, and once it’s gone it’s not coming back.
Around a month ago, Elon Musk changed his Twitter bio to the Bitcoin logo and tweeted that “in retrospect, it was inevitable”. This sent the Bitcoin price soaring $6,000, liquidating many people who were in short positions. The exact same thing happened again when Tesla announced that it had bought $1.5 billion worth of bitcoin weeks later.
This kind of manipulation, both positive and negative, can come out of the blue and ruin a perfectly valid short or long position. Those holding bitcoin or staying out of the market entirely wouldn’t have felt any effect from these two events, whereas leverage traders might have lost the lot, only for the price to return to its previous level just days later.
Another consideration for leverage traders is the tax situation. Regular trading results in capital gains and losses, whereas leverage trading could be considered income. This is because of the way you earn your winnings – with regular trading the value of the asset you hold goes up and down in its monetary value but you don’t get any more of the asset, whereas with leverage trading you are earning more dollars through your trade. This is usually classed as income, and so can warrant a higher level of taxation.
So you can earn the exact same level of profit from a regular trade and a leverage trade and come away with less in the bank with the latter because of the tax on the leverage trade.
No Harm in Testing Leverage Trading
There are other reasons why leverage trading is not advisable for the vast majority of crypto traders, but sometimes it takes a chastening loss to realize that it’s not all 200% gains and clout chasing. There’s no harm in testing out leverage trading with a small amount of cash, but make sure you know exactly how it works, have a stop loss in place, keep the leverage very low at the outset, and only use money you can afford to lose.
Crypto Twitter may make it look like everyone is doing better than you, but remember – regular winners are drawing on years of experience, and no one posts their losses. Our advice is to trade with just a small amount, or preferably stay away entirely.