Leverage is one of the concepts of trading that cannot be neglected by traders. It's been used in almost every financial market and is known as a way for traders to increase their profits without having to pay for 100% of trade.
It enables traders to bigger bets on the market and increases their chances of winning. But then, there's also risk involved when using leverage.
You need to understand how leverage in crypto trading works before using it, thus, I'll give appropriate and detailed answers to the most frequently asked questions about "Leverage" such as:
- What Is Leverage Trading?
- How Does Leverage Trading Work In Crypto?
- What Is 10x Leverage In Crypto?
Without further ado, I'll be elaborating more on what leverage means in crypto trading, how it works, and the risks involved.
What Is Leverage Trading?
Leverage trading is a strategy used to increase your trade position size to amplify gain or profit by borrowing funds from a trading platform.
When you open a crypto trading account, you’re getting your hands on a small amount of money. You can trade using this amount and make some money, but if you want to multiply your profit with less of your capital at stake, you have to make use of leverage.
The most common type of leverage is margin lending, which enables you to use borrowed funds to purchase more bitcoin than you have available in your account.
How Does Leverage Work In Crypto?
The first thing to do before using leverage is to fund your trading account which would be used as the collateral for your leverage trading. How leverage works in crypto trading is that; it allows you to invest in any available crypto asset more than the amount you wish to open the position.
The best way to explain how leverage works is by showing an example: Let’s say you open a position worth $1,000 with a crypto trading platform.
Then the trading platform lends you $2,000 in margin fund and lets you trade this position for 1:2 leverage — meaning that your capital of $1,000 represents 2X the value of the position (i.e., if this were not leveraged, the $1,000 would represent only 1X).
For instance, if you think that the price of ETH would increase and open a long position with $50 by using 10x leverage, you would automatically buy the ETH position with $500. Your collateral for the trade is $50 (which is your capital).
So when the ETH price increases by just 10%, you'd make 100% profit of your collateral (which is $50) — compared to the $5 you would've made on the trade if you don't use leverage.
Conversely, your loss potential is the same as the profit — you'd get liquidated if ETH decreases in price by 10% because your collateral on that position is $50.
However, leverage trading allows you to deposit more funds to your trading account as collateral to maintain the trade position — meaning you won't get liquidated if you increase your collateral.
For instance, if you deposit more than $50 to your account which now makes you have $100 as collateral, the liquidation price would be adjusted, and your position will only get liquidated when ETH decreases by 20%.
What Is 10x Leverage In Crypto?
10x leverage in crypto simply means buying a crypto asset with 10x of your actual fund.
When you use 10x leverage to open a trade, it multiplies your capital and lets you make 10× of the profit or loss you'd make if you don't use the 10x leverage.
So if you have $200, It allows you to open a position with $2000.
Conclusion
Leverage allows traders to have more money to trade with, which can be beneficial if you're trading on smaller amounts of crypto.
Leverage can also make it easier for experienced traders to take bigger positions because they don't have to bet all their funds. It's also essential to know that leverage trading increases your loss potential.
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