Welcome to the next installment of Hubble’s Crypto Basics series on lending. This article will cover the basics of how crypto leverage works. All leverage depends on borrowing and lending, so if you’re interested in how this works in crypto, check out our previous articles:
- What is Crypto Lending and How It Works
- What are the Best Solana Protocols to Lend Crypto
- Find the Best Crypto Lending Rewards on Solana
This article will focus on how to borrow crypto for leverage. Leverage trading crypto increases exposure to your position. The more leverage you take, the more you can amplify your gains when prices go up. Vice versa, the more leverage you take, the faster you can lose your deposit.
Always do your research before participating in decentralized finance (DeFi) and using DeFi for leverage. This article is not financial advice.
Looping: How to Manually Leverage Crypto Positions
Leverage is made possible by borrowing crypto, which means you have to also deposit more crypto than you borrow. If you want to manually leverage your crypto positions, you can deposit tokens on Solend and borrow crypto against the value of your collateral.
Your collateral is what ensures you will repay your loan. If you borrow too much, and the value of your collateral drops, then your collateral will be forfeited to repay your loan.
When you manually leverage your position, you can watch your liquidation threshold shrink with each manual loop, so manually leveraging your position is a good introduction. As you borrow, deposit, and leverage, you see how much borrowing for leverage can affect your liquidation risk.
Leverage Trading Crypto Long with SOL on Solend
- Deposit SOL on Solend
- Borrow stablecoins. The closer you borrow to your borrow limit, the more you can leverage–and the closer you advance to your liquidation point.
- Swap stablecoins for SOL on Jupiter
- Deposit SOL on Solend
- Borrow more stablecoins, and repeat. Notice how you must borrow fewer stablecoins with every loop.
Every repetition of this process increases your leverage on SOL. It increases your exposure to SOL price movements by multiples, so if SOL’s price rises, you can multiply your profits from that increase in price.
However, if SOL starts falling in value, you can lose everything you’ve deposited if you cannot top up your balance and increase your deposit. If you think that SOL will fall in value, then it’s a bad idea to leverage long; otherwise, it’s possible to leverage SOL short if you think it will consistently decrease in value.
Leverage Trading Crypto Short with SOL on Solend
You can manually short crypto with leverage by using Solend. All you have to do is is repeat the looping process to gain leverage, but instead of borrowing stablecoins, borrow SOL:
- Deposit stablecoins
- Borrow SOL
- Swap SOL into stablecoins
If SOL drops in value, then you can buy back cheaper SOL and keep the remaining stablecoins as profit. In contrast, if SOL rises in price while you’ve set this position, you can be liquidated. If you’re looping, you can lose everything, since you have used your borrowed funds as collateral.
How to Auto-leverage Trading Crypto with Fewer Clicks
You can manually leverage trade crypto, or you can auto-leverage trading crypto on crypto perpetuals markets. There are several crypto perpetual futures protocols on Solana that minimize the steps it takes to leverage your position, whether you want to go long or short.
To begin trading crypto with leverage on these protocols, you need to open and fund an account. Opening and funding an account can be done permissionlessly and only requires connecting a crypto wallet.
Mango Markets Offers Powerful Tools for Powerful Leverage
On Mango Markets, Solana perps are offered with 1x to 20x leverage, depending on the asset. You can also access leveraged spot trading with a maximum 5x leverage on volatile assets.
Leverage is not adjustable on Mango Solana trades. If you want to leverage SOL, you’ll need to accept 20x leverage in this go big or go home style of trading.
01 Exchange Lets Users Adjust Their Leverage and Access Power Perpetuals
01 Exchange is another protocol for trading crypto perpetuals on Solana. You can choose to leverage a position up to 10x on 01 Solana leveraged trading for assets from the ecosystem and other major tokens like AVAX, APE, and NEAR.
01 Exchange also offers power perpetuals, which allow you to hedge your position against loss. Power perpetuals are different from other crypto perpetuals in that they resemble options and can return amplified gains while minimizing losses.
Drift Protocol Revamps the Platform for Return to Mainnet
In May of 2021, Drift Protocol experienced a bug where users with a Drift trade account could redeem more collateral than they were entitled to. This bug was found during the LUNA meltdown stress test, and Drift decided to refund users, pause trading, and overhaul the platform before launching again.
The next version of Drift promises to bring several innovative features, such as just-in-time (JIT) and hybrid liquidity, to Solana derivatives trading. While it’s not possible to use Drift Protocol at the moment, you can sign up for updates on the future launch.
Crypto Leverage Necessitates Over-collateralization and Liquidations
Leverage trading crypto introduces the risk of liquidation. A liquidation occurs when the value of your collateral approaches 1:1 with the value of your debt. Your collateral will be forfeited at a liquidation threshold that prevents the protocol from losing money.
If you take on leverage for crypto trading, you can be liquidated if an asset drops:
- 2x leverage: 50%
- 3x leverage: 33%
- 4x leverage: 25%
- 10x leverage: 10%
- 20x leverage: 5%
These percentages do not factor in fees and rates that can push your position closer to its liquidation threshold. Remember, leverage can be a hell of a drug, and you should never take on leverage with more than you can afford to lose.
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