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”).
Used margin is the amount of your collateral balances that is withheld in order to enter a spot transaction on margin. Used margin is calculated as the size (or "cost basis") of the margin extension provided to you divided by the level of leverage selected.
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.
Maximum Position Size
The possibility of larger profits along with the risk of larger losses (and liquidation) is determined by the size of your open positions relative to your collateral balance and not merely by the level of leverage you select.
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.
How much leverage should be used?
However, if the position size is maximized based on the leverage selected, then a higher leverage level would be more risky.
Spot transactions on margin involve a high degree of risk and are not suitable for everybody. Before using leverage, please take time to fully understand it and the risks involved. 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.