Leverage and Futures in Digital Trading: The Sharia Perspective 📊🔍

Definition of Leverage and Futures in Digital Financial Markets

Leverage is a financial mechanism that allows traders to use limited capital to control much larger value trades. For example, this mechanism may allow an investor to open a trading position worth $10,000 using only $1,000 of their own capital.

Futures contracts are financial agreements that obligate the parties to buy or sell a specific asset at a predetermined price on a future date. These contracts are used in both traditional and digital derivatives markets.

The Legal Position on Leverage and Futures Contracts 🚫

Many scholars of Islamic law consider that trading using leverage and futures contracts in digital assets does not comply with the provisions of Islamic law for the following reasons:

1. Usury (Interest)

Leverage involves borrowing money at interest, where trading platforms charge fees on the borrowed amounts. Allah says in the Holy Quran: "And Allah has permitted trade and forbidden usury" (Al-Baqarah: 275).

2. Gharar ( Severe Uncertainty )

Futures contracts and leveraged trading are characterized by high levels of risk and uncertainty. The Prophet Muhammad (peace be upon him) prohibited the sale of Gharar, which is a sale that involves significant ignorance or uncalculated risk.

3. Gambling (Betting)

Trading with high leverage can be considered a form of gambling, especially when done without sufficient study or deep understanding of the market. Gambling is explicitly forbidden in Islam.

Financial Risks of Leverage in Digital Trading 📉

According to the available data, leverage greatly increases the risks:

• Liquidation Risk (Forced Closure): Positions can be liquidated quickly during adverse market movements, resulting in a total loss of the invested capital.

• Psychological Risks: Trading with leverage can lead to hasty decisions resulting from psychological pressure, especially in the volatile cryptocurrency markets.

• Volatility Risks: The cryptocurrency market is known for its sharp fluctuations, which are amplified when using leverage.

Regulatory Developments for Digital Futures 📋

According to the available information, there are significant developments in the regulation of futures contracts for digital assets:

• Futures contracts in digital trading will be settled in cash and will be subject to the 60/40 tax rule, where 60% of the profits will be taxed at long-term capital gains rates.

• The Commodity Futures Trading Commission (CFTC) may approve perpetual contracts for trading.

• The Digital Assets Market Clarity Act of 2025 aims to regulate digital commodities.

Sharia-compliant alternatives for Muslim investors 🌟

For investors wishing to comply with Islamic law, there are alternatives to trading using leverage and futures contracts:

1. Spot Trading (Spot Trading)

Direct purchase of digital assets and holding them without using leverage is considered more compliant with Islamic principles, as the investor is the actual owner of the asset.

2. Sharia-compliant Investment Funds

Some major trading platforms offer investment products specifically designed to comply with Islamic law, such as investment funds that avoid riba and gharar.

3. Low-Risk Trading Strategies

Investors can adopt more conservative and lower-risk trading strategies, such as a long-term buy-and-hold strategy or dollar-cost averaging.

Basic Rules for Responsible Investment in Digital Assets 📝

Regardless of the legal opinion, investors should consider the following principles:

• Knowledge Before Investment: Understand digital assets and the underlying technologies before investing money in them.

• Risk Management: Do not invest more than you can afford to lose.

• Diversification: Avoid concentrating investments in a single digital asset.

• Continuous Research: Keeping up with regulatory and technological developments in the field of digital assets.

Summary of the Legal Position

Islamic law aims to protect wealth and avoid financial transactions that involve injustice or exploitation. Accordingly, many scholars of Islamic law believe that leverage and futures contracts in digital trading contain prohibited elements such as usury, uncertainty, and gambling.

A Muslim investor keen on adhering to the provisions of Sharia can choose alternatives that comply with Sharia, which provide a suitable return without falling into prohibited transactions.