How to Calculate Leverage and Margin in Bitcoin Trading

The definition of Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the online Bitcoin trading market to attract many traders and investors.

Example:We shall use this example to explain what leverage is? If your Bitcoin broker gives you leverage of 5:1 (this is the leverage option provided for Bitcoin trading)

This means you borrow 5 dollars for every dollar you have in your Bitcoin trading account.

To put in another way your broker gives you 5 dollars for every 1 dollar in your trading account. This is what is known as leverage.

This means if you open an account with $20,000 and your leverage is 5:1, then your get $5 for every $1 you have, the total amount of capital you will control after leverage is applied is:

If for 1 dollar the broker gives you $5

Then if you have $20,000 you will get a total of:

$20,000 * 5 = 100,000 dollars

Now you control $100,000 dollars of Investment

What is Margin?

Margin is the amount of money required by your broker so as to allow you to continue trading with the borrowed amount (leveraged amount).

In other words the question what is margin in Bitcoin trading? Can be explained as the money required to cover open BTCUSD trades and is expressed in percentage. For 5:1, the amount you will control is $100,000 dollars as explained in the above example.

Now can you compare someone investing $20,000 with another one investing $100,000? Obviously Not. This is how it works; leverage takes you from that guy investing $20,000 to that one investing $100,000 or from that one investor investing $50,000 to that one investing $250,000. Where does this extra money come from? You borrow from your broker in what is simply known as Leverage. This money that you borrow, you borrow it against the $20,000 dollars or $50,000 dollars of your own that you deposit with your broker. If you were to explain what this means - then it is the ability to control a large amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade Bitcoin without this leverage it would not be as profitable as it is, in fact you can still choose not to use leverage when trading BTCUSD, using the leverage 1:1 option - but you would not a lot make money, it would take too long to make any profit. In online trading leverage is what makes trading in financial instruments profitable.

Example of how to calculate leverage:Margin required in this case is 20,000 dollars (your money) if it is expressed as a percent of 100,000 dollars which you control it is:

If leveraging = 5:1

20,000 / 100,000 * 100= 20%

Margin required = 20%

"TradeForexTrading - Please simplify because I am Beginner"(Simplify - your capital is $20,000 after leverage you control $100,000 - $20,000 is what percent of $100,000 - it is 20%) that is your margin requirement.

In the example below, the set leverage is 5:1, the margin which is 20% is $929.83, therefore the total amount controlled by the trader is: $5,485.240 - this is because with leverage the trader has used little of his money and borrowed the rest, with this leverage set at 5:1, the trader is using 20% of their capital, this 20% is $929.83, if 1% is $929.83 then 100% is $5,485.240.

MetaTrader 5 Transactions Window - Online Platform for Trading Bitcoin and Currencies

Leverage and Trading Bitcoin Lots

In Bitcoin trading - Bitcoin is traded as lots, commonly known as contracts. 1 contract or 1 lot of Bitcoin is made up of 1 unit of Bitcoin. 1 unit of Bitcoin is 1 Bitcoin. Therefore, 1 lot of Bitcoin is equivalent to 1 Bitcoin.

If price of Bitcoin is $5,485.240 per 1 Bitcoin, trading 1 lot of Bitcoin equal to 1 Bitcoin means that a trader will be trading a contract worth $5,485.240. Therefore, 1 Bitcoin lot will be equal to $5,485.240 - to trade this 1 lot a trader with leverage 5:1 only needs to have $929.83 as their margin and then borrow the rest using leverage from their broker.

Margin trading accounts allows Bitcoin traders to control a large amount of Cryptocurrency using little of their own capital while borrowing the rest. Obtaining this account will enable you to borrow money from your broker to trade BTCUSD lots with -the lots of Bitcoin are worth about $5,485.240 or the current price of 1 Bitcoin.

The amount of borrowing power your account gives you what is called "leverage", and is usually expressed as a ratio - a ratio of 5:1 means you can control resources worth 5 times your deposit amount or the balance amount in your Bitcoin trading account.

What this means in trading terms is that with 20% margin in your account you can control one standard lot/1 contract of Bitcoin worth $5,485.240 with a $929.83 deposit amount.

However, trading this account increases both potential for profits as well as losses. In online trading you can never lose more than you invest, losses are limited to your deposits and usually online brokers will close a transaction that extends beyond your deposit amount by executing what is known as a margin call. Traders must therefore try to keep their margin level above that which is required by their broker. By using money management rules a trader can learn how to manage their account capital and keep their trading risks to a minimum.

Advantages of Leverage

As mentioned above, this type of trading account gives you more buying power and the potential for more profits or losses. How this works is; a 20% margin allows you to control a position size of $5,485.240 with $929.83. When you open a transaction of $5,485.240 with $929.83 of your own, a small market changes in the price of the BTCUSD Cryptocurrency can result in large profits or losses.

BTCUSD movements are measured using points. For example, Bitcoin BTCUSD, is transacted in units down to 3 decimal places, the last decimal place is called a point. The price quote of BTCUSD is seen as $5,485.240 - When you are trading one lot of $5,485.240 then each point is worth $0.001 profit. So if this price moves up 1 point to $5,485.241 you will make $0.001 profit. $1 change in the price of Bitcoin is equal to 1,000 points, if price of BTCUSD moves by $3 (100,000 points or $100 price change) in one day, you make $100 dollars, if this move is against you, then you lose $100.

Supposing you now decided to use more leverage and trade 5 lots of Bitcoin at once - When you are trading 5 lots of $5,485.240 then each point is worth $0.005 profit. So if this price moves up 100,000 points to $5,585.240 (100,000 points move per 1 Bitcoin, equal to $100 price change in Bitcoin) you will make $500 profit - this is because you will be trading 5 contracts of Bitcoin at once. 5 contracts of Bitcoin is equal to 5 Bitcoins. $1 change in the price of Bitcoin is equal to 1,000 points, if BTCUSD moves by $100 (100,000 points) in one day, you make $500 dollars, if this move is against you, then you lose $500, because you will be trading 5 Bitcoins at once.

There is also the method of money management and risk management topics that traders will learn on the next tutorials so as to understand more about leverage and also learn how to trade with leverage in a manner that will help them make profits in the long term.

If price changes from $5,485.240 to $5,486.240 which is a difference of 1,000 points which represents a profit of $1. With Leverage if you have $1,000 dollars in your account you can open 5 Bitcoin Lots and your profit will be $5 instead of $1. This is because with leverage you can borrow 5 times what you deposit and therefore make more profits using this leverage. Without leverage if you had $1,000 account, the price change from $5,485.240 to $5,486.240 represents a difference of $1 profit. So the benefit of this online Bitcoin trading is increased profit potential, your profit factor is multiplied by 5 based on the 5:1 leverage option provided by your broker.

You do not need a calculator for these profit and loss calculations, these profit and loss levels and account balance and account equity are calculated and displayed by many of the online trading platforms provided by the Bitcoin trading brokers, for example in MetaTrader 5 these levels are shown under the trade transactions window (Press CTRL+T on your keyboard to access it while your MT5 platform is open) these levels are displayed, just below your open Bitcoin trade transactions.