Introduction to Leverage Trading
Leverage trading allows cryptocurrency investors to amplify their trading positions by borrowing funds. This advanced financial strategy can increase potential profits but also magnifies risks. Understanding the rules and mechanisms behind leverage trading is essential for anyone considering this approach.
Platforms facilitate leverage trading by lending users assets, which are secured by the user’s existing collateral. Proper risk management, including monitoring leverage ratios and interest rates, is critical to avoid liquidation.
Key Concepts in Leveraged Trading
What Is Leverage?
Leverage involves using borrowed funds to increase exposure to a cryptocurrency asset. For example, with 5x leverage, a $100 investment can control a $500 position.
How Borrowing Works
Users can borrow assets against their existing holdings. The maximum amount available to borrow depends on the user’s equity and the platform’s risk management policies.
Borrowing Rules and Calculations
Maximum Borrowable Amount
Your maximum borrow limit for a specific cryptocurrency is determined by your account equity and the leverage multiplier offered. The formula used is:
Maximum Borrowable Amount = (Total Assets - Outstanding Borrowed Assets - Accrued Interest) × (Leverage Multiplier - 1) - Outstanding Borrowed Assets
This ensures you maintain sufficient collateral relative to your borrowed amount.
Interest Calculation
Interest on borrowed assets is calculated on an hourly basis. It begins accruing immediately once borrowing occurs and is compounded every natural hour.
The formula for interest is:
Interest = Borrowed Amount × Hourly Interest Rate × Number of Hours Borrowed
Regularly paying interest helps avoid unnecessary increases in debt.
Repayment Guidelines
How to Repay
Users can manually repay borrowed assets, either partially or in full. The system prioritizes repaying the oldest borrow orders first. Interest is paid before principal.
After repayment, interest is recalculated in the next hour based on the remaining borrowed balance.
Important Repayment Principle
Borrowing and repayment follow a “like-for-like” rule. If you borrow a trading pair’s base asset, you must repay in the same asset. Ensure you hold enough of the required cryptocurrency before initiating repayment.
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Loan Tiers and Risk Levels
Understanding Loan Tiers
Loan tiers reflect the amount you have borrowed. Higher borrowing amounts result in higher tiers, which correspond to increased liquidation risk levels.
If you borrow both assets in a trading pair, the tier is determined by the larger borrowed amount, and the corresponding liquidation risk level applies.
Transfer Rules for Leverage Accounts
Withdrawal Conditions
When transferring assets out of a leverage account, you must ensure that the remaining assets maintain a safe risk level.
The required risk rate after withdrawal must satisfy:
Risk Rate ≥ (Leverage Multiplier / (Leverage Multiplier - 1)) × 100%
For instance, with 5x leverage, the risk rate must remain at or above 125% after any transfer.
If the calculated maximum transferable amount exceeds your available balance, you can only withdraw up to your available assets.
Risk Management and Liquidation
How Collateral Works
Only assets within the same trading pair in your leverage account count as collateral. Assets in other pairs or accounts are not considered.
Risk Rate Monitoring
Platforms continuously monitor your risk rate to determine account health. The formula for risk rate is:
Risk Rate = (Total Assets - Unpaid Interest) / Total Borrowed Assets × 100%
Where:
- Total Assets = Sum of all assets in the leveraged trading pair
- Borrowed Assets = Total borrowed and unpaid assets in the pair
- Unpaid Interest = Borrowed amount × hourly interest rate × hours borrowed - interest already paid
What Is Liquidation?
If your risk rate falls to the liquidation level for your loan tier, the system will automatically liquidate your positions. You will be notified via email or SMS.
Once triggered, all your pending orders in that trading pair will be canceled. The system will sell your holdings to repay the borrowed assets and accrued interest.
Understanding Liquidation Fees
After liquidation, if any assets remain, 8% of the remaining balance is taken as a liquidation fee. This fee is allocated to the platform’s risk reserve fund.
Liquidation fees apply as follows:
- If the remaining base asset is ≥ the minimum trade size, 8% is taken.
- If below the minimum trade size, the entire remainder is taken.
- If the quote asset ≥ 5 USDT, 8% is taken.
- If below 5 USDT, the entire remainder is taken.
Handling Insolvency
If your account is liquidated and the proceeds are insufficient to cover your debt, the platform’s risk reserve fund will cover the shortfall. You will owe nothing beyond your lost collateral.
Purpose of the Risk Reserve
The risk reserve fund is funded through liquidation fees and a portion of interest income. It protects the platform and users from extreme market volatility and insolvency risks.
Frequently Asked Questions
What is leverage trading?
Leverage trading involves borrowing funds to trade larger positions than your initial capital allows. It increases both potential gains and losses, making risk management essential.
How is interest calculated on borrowed funds?
Interest is calculated hourly based on the amount borrowed and the applicable hourly rate. It accrues from the moment you borrow and compounds every natural hour.
What happens during liquidation?
If your account’s risk rate hits the liquidation threshold, your positions are automatically sold to repay borrowed funds. A liquidation fee may apply, and you may lose most or all of your collateral.
Can I repay borrowed assets early?
Yes, you can repay early either partially or in full. Early repayment reduces your interest obligations and may improve your risk rate.
What is a loan tier?
Loan tiers represent how much you have borrowed. The more you borrow, the higher your tier and associated liquidation risk rate.
How do I avoid liquidation?
Monitor your risk rate regularly, maintain sufficient collateral, and avoid over-leveraging. Repay borrowings during favorable market conditions to reduce risk.
Conclusion
Leverage trading is a powerful tool for traders seeking to maximize returns. However, it requires a solid understanding of risk management, interest accrual, and platform rules. Always trade responsibly and never risk more than you can afford to lose.
By following the guidelines outlined here, you can make more informed decisions and navigate leveraged trading with greater confidence.