Spot transactions on margin allow you to make spot purchases and sales of cryptocurrencies, on the Kraken exchange, using funds that exceed the balance of your account. Leverage, in this context, determines two things:
- Your used margin following an extension of margin.
- The maximum amount of margin Kraken will extend to you for a spot transaction on margin (your maximum “position size”).
Let's say you purchase 5,000 USD worth of BTC on the BTC/USD order book using an extension of margin.
With 5x leverage, only one-fifth of the position size, or 1,000 USD worth, will be withheld from your collateral balance upon purchase of the BTC.
With 2x leverage, half of the position size, or 2,500 USD worth, will be withheld from your collateral balance upon purchase of the BTC.
When placing a margin trade, position size is selected separately from the leverage level. Selecting 5x leverage does not mean that your position size is automatically 5x bigger. It just means that you can specify a position size up to 5x your collateral balances.
Among other things, using margin to support spot purchases and sales of cryptocurrencies can amplify your gains as well as your losses and can even rapidly wipe out your account if you aren't careful or the market moves against you.
Sensible risk management should be employed when trading on margin. For example, you should consider setting both a stop loss and a profit target for every open position. There are a lot of concepts to learn, but this is your money at stake, so it's worth your time to walk through everything carefully.