Leverage trading is a popular strategy among cryptocurrency investors, allowing them to amplify their trading positions by borrowing funds. This method can significantly increase potential profits but also comes with heightened risks. A critical aspect of leverage trading is understanding how interest is calculated on borrowed funds and the rules governing these transactions.
This guide provides a detailed overview of leverage trading interest rates and key regulations, helping you navigate this advanced trading feature effectively.
How is Leverage Trading Interest Calculated?
Interest rates for borrowed funds in leverage trading are dynamic and updated hourly. The system calculates a benchmark rate each hour based on the supply and demand of borrowed assets and assets deposited in savings accounts. The actual daily interest rate is the sum of the benchmark rates over the previous 24 hours, divided by 24.
Rates are structured into six tiers for each cryptocurrency, determined by the ratio of total borrowed assets to total assets in savings accounts. Note that QTUM and IOST have fixed daily interest rates due to halted borrowing.
When you borrow assets, the daily interest rate is locked for 24 hours. This means your borrowing cost remains constant during this period. After 24 hours, the rate updates to the latest hourly rate. For example, if you borrow Bitcoin at a daily rate of 0.0002, this rate applies for the next 24 hours before updating.
Key Leverage Trading Rules Explained
Asset Management
- Total Leverage Account Assets: The sum of all cryptocurrencies in your leverage account, including available and frozen assets.
- Transferred Assets: Funds moved from your spot account to your leverage account.
- Borrowed Assets: Cryptocurrencies borrowed using transferred assets as collateral.
- Available Assets: Assets in your leverage account that can be used for orders.
- Frozen Assets: Assets that are temporarily unavailable for trading.
Leverage and Borrowing
- Maximum Borrowable Amount: The highest amount you can borrow for a specific trading pair, with current maximum leverage set at 3x.
- Calculation Formula: Maximum borrowable = (Total account assets - Unpaid borrowed assets - Unpaid interest) × (Leverage multiplier - 1) - Unpaid borrowed assets.
Risk and Liquidation
- Risk Ratio: An indicator assessing liquidation risk. If the ratio is ≥150%, excess assets can be withdrawn. At ≤130%, warnings are issued. At ≤110%, liquidation occurs.
- Risk Ratio Formula: Risk ratio = [(Quoted currency total assets - Quoted currency unpaid interest) / Latest price + (Traded currency total assets - Traded currency unpaid interest)] / (Quoted currency borrowed assets / Latest price + Traded currency borrowed assets) × 100%.
- Liquidation: Occurs when the risk ratio falls to 110%, triggering automatic repayment of borrowed funds using account assets.
- Liquidation Price: The price at which liquidation happens, calculated based on borrowed assets, interest, and current asset values.
Interest and Repayment
- Interest Payment: Interest is charged per borrowing order. The first payment occurs at borrowing, followed by every 24 hours.
- Repayment Priority: Orders are repaid from oldest to newest. Interest is paid before principal. Once both are settled, the order closes.
Strategies and Risk Management
Leverage trading allows you to take long or short positions with up to 3x leverage. While this can multiply profits, it also increases potential losses. Effective risk management is crucial. Always monitor your risk ratio and avoid over-leveraging. Diversify your strategies and use stop-loss orders to protect your investments.
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Frequently Asked Questions
What is leverage trading?
Leverage trading involves borrowing funds to amplify your trading position. It enables higher potential returns but also increases risk exposure.
How often do interest rates update?
Rates update hourly, but your borrowing rate locks for 24 hours from the time you borrow.
What happens during liquidation?
If your risk ratio hits 110%, the system automatically sells assets to repay borrowed funds and interest.
Can I withdraw assets during high risk?
Yes, if your risk ratio is 150% or higher, you can withdraw excess assets.
Is leverage trading suitable for beginners?
Due to its complexity and high risk, leverage trading is better suited for experienced traders with a solid risk management strategy.
How is the liquidation price determined?
It is calculated based on borrowed amounts, interest, and current asset values, ensuring lenders are repaid during market downturns.
Conclusion
Leverage trading offers opportunities for enhanced profits but requires careful attention to interest rates and risk management. By understanding the rules and maintaining a disciplined approach, you can effectively utilize this powerful trading tool. Always prioritize learning and risk control to navigate the volatile cryptocurrency market successfully.