Does Trading Crypto With Leverage Make Sense?

If you’ve ever listened to crypto influencers on YouTube, you have most likely heard the host talk about how they executed a buy or sell leverage trade perfectly. These same influencers share their Blofin or other leverage platform trading referrals and make leverage trading sound so easy.

Sometimes, you follow their ‘not financial advice’ and get rekt on the same trade that they made a killing in. What gives? You’re probably not paying for their added service or community, or you would have traded it perfectly, right? Not exactly.

People who pay extra to join those communities often get rekt like you did. If these communities and signallers were so accurate, they wouldn’t need paying clients. Wouldn’t they make the trades themselves and grow their portfolios exponentially?

The crypto market has a magical way to ‘washout’ leverage traders, whether long or short. This is why decentralized derivative platforms are some of the most profitable protocols. And large exchanges like Binance and Coinbase are eager to add more leverage trading pairs.

And crypto traders are inherently risk-hungry and willing to take obscene risks to make massive gains within a 24-hour timeframe.

That raises a valid question: Should you follow these leverage-trading influencers, or would you be better off buying and holding in the market? The answer isn’t crystal clear, and in this article, I will share some of the benefits and challenges of each strategy.

Finally, I’ll share my opinion and my conclusions with both.

Leverage Trading

Maybe you don’t have much money to invest in crypto. Perhaps you want to make 10x gains in a month. Maybe you’ve found a pair trading strategy that seems infallible. Or, you signed up for a service or are getting signals from your friend with a successful track record.

The allure of leverage trading in crypto is undeniable. I’ve leverage traded and woken up thousands of dollars richer than the night before. On other days, I’ve woken up completely broke after getting liquidated.

First, let’s examine some of the positive aspects of leverage trading:

• Leverage trading can magnify your gains and help you grow your portfolio quickly.

• Leverage traders often take profits and close their trades. Buy-and-hold investors are susceptible to watching their gains slip away because they didn’t sell.

• It’s exhilarating. The crypto market is open 24 hours per day. You can trade either direction and don’t always have to be a permabull.

• You can open multiple positions and get exposure to crappy assets that you would never dream of buying and holding.

• Many platforms provide airdrops, points, or incentives for trading. These can further enhance wins and help compensate for losses.

• One big win can make up for several losses

Now, let’s consider leveraged trading’s darker aspects:

• You constantly need to be monitoring the crypto market and charts. It can absorb a massive amount of your attention that may be more productive elsewhere.

• Overall, it’s a losing proposition. Market makers can and do hunt liquidity. If it weren’t a losing proposition, you would see more leverage trading platforms close shop. While I don’t have the statistics, my guess is that 20% of traders make 80% of the profits.

• It’s emotional. You may feel on top of the world in the morning when your trades are green and in the depths of despair the same evening when everything turns red.

• One bad trade can wipe out all of your wins. It’s easy to gain false confidence in an extreme market. In addition, you have to pay funding fees, which can get extremely expensive.

• Sometimes, you will exit positions before they have completed their run-ups and miss out on potentially greater returns.

Buy-and-Hold Trading

Most crypto investors begin with a buy-and-hold strategy. As they become more degenerate, leverage trading seems even more profitable with quicker gains.

Searching for fundamentally good assets with strong narratives is more akin to what we are accustomed to with stock and real estate investing. Therefore, applying similar principles in crypto seems logical when approaching the market.

Most crypto investors (even if they leverage trade) have a buy-and-hold strategy. So, let’s review some pros and cons of buy-and-hold trading. Here are some obvious benefits.

• Crypto is volatile, so buy and hold is still emotional, but you can check your portfolio once or twice a day without worrying about being blown up.

• You have time for your investments to mature. You aren’t paying any borrowing fees and can exit the trade when comfortable.

• News events and market manipulation won’t easily shake you out of your positions. You (hopefully) have a thesis for owning the crypto, and it won’t change based on the latest piece of hype or fear.

• One big win can be more profitable than a successful leverage trade. Buying and holding cryptos that can go 10–100x is possible and not uncommon.

• A washout won’t liquidate you and force you to start from scratch. It may even be an opportunity to buy more or buy new assets at a lower cost basis.

While buy-and-hold does afford you more time and less short-term anxiety, there are definitely some drawbacks with it.

• If you want to make fast profits, you either have to purchase a lot of an asset and risk/tie up those funds or you need to purchase a risky crypto.

• It’s too easy to continue buying and holding more thinking the market will continually go higher, and then watch as your paper gains and new purchases disippate into oblivion.

• If you are on-chain, you may be more susceptible to using DeFi platforms that are popular hangouts for hacks, exploits, criminal devs, and blatant rugpulls.

• You are battling VCs, insiders, market makers, influencers, and the syndicate that manipulates projects. It’s hard to tell if you are exit liquidity or early to the next big thing.

• Projects often end up delivering little of what they promised and you may waste a lot of time doing research or getting excited over something that undelivers.

My Experience

Earlier this year, I tried out leverage trading crypto for the first time. It went amazingly well until it didn’t. I managed to withdraw a lot of profits and when the market was going decidedly lower, I stopped trading with leverage.

That is, until I was enticed to a narrative about Ethereum. I thought the price would tank so I made a heavy levered short position against it. It was going well until the ETH ETF approval when I experienced instant carnage.

I was shooting for the fences and wound up striking out. I learned a few lessons from this experience.

1. Unless you really know what you are doing or you have made a lot of gains from leverage trading, keep your risk capital as a small portion of your portfolio.

2. I won’t ever go all in with leverage trading thinking that something is foolproof. I’d rather spread my bets among multiple possibilities.

3. Losing huges sums of money in thirty minutes is stupid and painful. It’s on par with the feeling of losing thousands in Las Vegas or another casino.

Up until this experience, I had only done buy-and-hold with crypto. Overall, it has worked well because I have stayed in the markets and accumulated during the bear and bull alike.

My biggest challenge that I’m working on this time around is booking more profits. My first cycle, I gave back all my gains. Last cycle, I booked quite a bit, but had a habit of selling into stables and buying something else.

I invested in a rug and went in over my head and got smoked. Ultimately, leverage trading and buy-and-hold are challenging because crypto is such a new and volatile asset class.

It doesn’t help that 90% of the space is garbage.

My Verdict

Emotionally, I have to be primarily a buy-and-hold investor. I don’t like waking up in the middle of the night, checking CoinGecko, and making trades. And, while I loved waking up thousands richer, I despised the opposite.

That said, I will still allocate a tiny portion of my portfolio to leverage trading. Overall, I was up because I managed to withdraw some of my gains before getting liquidated. I started with a small bag in February and by April it was huge.

I must reiterate that I lost most of that huge bag on a leveraged play that I never would have touched if I didn’t use leverage earlier in the year.

Unless you are very experienced or an insider with information, my thoughts are that leverage trading is too risky for more than 1-10% of a portfolio. It’s too easy to get blown up, and just when you think you are unstoppable, you hit a brick wall.

And, if you aren’t a complete degenerate, you can always use lower leverage and have more moderate of an approach. I didn’t do that. It’s hard to do that when you see the quick gains.

Clap if you agree that buy-and-hold is a better strategy for a larger portion of your portfolio. Have you ever had that feeling that you are unstoppable trading with leverage and quickly get put in your place? Feel free to share it in the comments.

Also, if you have a strategy that works for you, please share it. The idea is that we all can learn from each other.

Thank you for reading. I appreciate your time.

This information should not be taken as investment advice. I am no more qualified to give financial advice than to do acrobatics in a circus travelling from city to city. Digital assets like crypto and NFTs involve risk, so you should always perform due diligence before investing.

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