With Bitcoin and other major cryptocurrencies enjoying a bull market that does not seem to end, traders are starting to see more offers enticing them to take a chance on derivative instruments similar to options and futures contracts. Almost invariably, these offers will be accompanied by a suggestion to apply for leverage, which is required whenever traders do not have sufficient funds to cover their derivative positions.
Leverage trading is an option offered by various digital currency exchange platforms. This option, which is also known as margin trading, essentially lets you borrow money from the platform, which essentially becomes a broker, so that your position on the market will be larger, hence increasing your profit potential.
Trading on margin is a Wall Street tradition that trickled down to day traders long before cryptocurrency exchange platforms started doing business. These days, there are various sources of margin trading: banks, hedge funds, and private equity funds account for the bulk of Wall Street trading volume, and they all do so on margin . With private equity funding, hedge funds can provide funds to fund traders in the form of shares, which can be traded in margin trades. In the case of private equity funds, hedge funds can sell bonds at a higher or lower risk of losing money, so that they could afford to make higher or lower bets on the assets they wish to profit from.
The problem all traders face when they add leverage to their trading portfolios is that they automatically increase their risk profiles. When you take into account the sheer volatility found in the cryptocurrency markets these days, trading on leverage can be downright dangerous. Exchange platforms do not typically report on how frequently they have to exercise margin calls on their clients, but if you delve into Twitter and online forums where digital currency trading is discussed, you will see that this has been taking place quite often over the last few months.
Leverage trading is not necessary in the cryptocurrency markets. If you can meet some of your investing goals without getting into derivatives, you will be better off. Trading on margin during periods of high volatility can be very risky.