So real quick, this might not be legal in all places and honestly isn't recommended unless if you know what you are doing.

​

What is it?

You might see things like this

https://preview.redd.it/ak2f33cvbfgb1.png?471&format=png&auto=webp&s=152293e61d551efd856ec4211eeab7d707507109

Kraken even has this https://www.kraken.com/features/margin-trading

​

It allows traders to borrow additional funds from a cryptocurrency exchange or platform to increase the size of their position beyond what they can afford with their own capital. The borrowed funds act as leverage, and traders can use this leverage to take larger positions in the market, magnifying both potential profits and losses. Common leverage ratios in the crypto market are 2x (1:2), 5x (1:5), 10x (1:10), and even higher.

For example, if a trader has $1,000 and uses 5x leverage, they can effectively trade with $5,000 worth of cryptocurrency. This means that any gains or losses will be calculated on the $5,000 position, not just the initial $1,000.

​

Risk:

The biggest risk is if the price goes down. Basically if you are doing a 5x leverage. This means you need to 5x any loss. So for example,

• Initial investment: $1,000
• Leverage: 5x
• Total position size: $1,000 x 5 = $5,000
• Price drop: 50%
• Loss: $5,000 x 50% = $2,500

​

Now this is just an example. What happens in reality is like margin trades in stocks. If your losses reach a given limit, then liquidation can happen. This protecting the funds of what you're using.

The liquidation process is meant to trigger before your initial investment reaches $0. The reason is if it goes into negative in most cases, the exchange will absorb the loss beyond your initial investment, and you will not be in debt to the exchange for an amount greater than your initial investment. At least this is normally how it works.

​

So the big thing to note from this is any decrease in this case with using a 5x leverage. You can 5x the decrease. So if my math is right, for a normal market 5% decrease, you are looking at a 25% decrease in value.

So if we use the $1,000 as an example with the crypto price dropping by 5%. Without the 5x leverage the price is now $950. But with a 5x your value is now $750.

​

Reward:

At the same time, there is more rewards with this. And obviously the liquidation event shouldn't happen when the price goes up. It works similar to the section on risk, but the other direction where you're making money and not losing.

For example, and this is assuming my 3am math is right.

Lets say you put in $1k in a 5x leverage and there was a 5% increase. This means if you cashed out right there, you would have a 25% increase or $250 profit. Where otherwise you would had a $50 profit without a 5x leverage.

This is one method some used to get a lot of money quicker. But again, the risk on this are far far far higher. And predicting the market is extremely hard.

​

​

Fees:

Depending on the exchange depends on this. But there tends to be fees when dealing with this. You can have leverage interest or funding rate fees. Funding rates can vary and are usually calculated periodically, such as every 8 hours. In this you're being charged and interest for borrowing the funds.

There could be an inactivity fee. I never heard for this personally in crypto, but I seen this a long time ago in the stock market. So it wouldn't shock me at least 1 exchange has this.

Most places will have a liquidation fee. Like if the price drops too low and the system sells.

​

An example of some of the fees you need to watch out for is like the following from Kraken. Where they have a opening fee, and a every 4 hour fee.

https://preview.redd.it/ob5zk79lefgb1.png?1209&format=png&auto=webp&s=a3a107a878dce0f26ac86c3d6144730469bc348f

​

My point being is, if you are thinking of doing this you really need to research this, research who you want to trade with, and so on. This isn't as straight forward as normal trading, and it's far easier to lose your value. But, at the same time it can make a lot of money quickly if you are lucky.

​

Oh and side note. I don't do this because of the risk. But I figure I should make a guide for anyone interested in this.