Leverage in financial markets is a common thing. Most of the market brokers or exchanges have such a facility. It boosts the trade with the potential to earn double.
Crypto traders use it to enhance their investments.
The cryptocurrency market is new to beginners, and they are mostly confused. To help such traders with what is leverage in crypto trading? We have an explanation of leverage and how traders can use it.
So, let’s begin and learn about leverage in crypto trading.
Leverage in Crypto trading
Leverage is borrowed capital. In the cryptocurrency market, traders can use leverage to trade high. Hence, increasing the buying power of the crypto trader. Although it works the same for other financial instruments.
The buying and selling power is increased with the current capital available in the wallet. The amount of leverage provided differs between brokers and exchanges. Some have 100 times while others 500 or more and less than that.
It is depicted on the platform in ratios. For example, 1:100, 1:200 and 1:500. The amount mentioned in second place is used. Thus, it multiplies with the current capital to raise the trade position.
The leverage ratio is accessible every day. Traders can apply it with spot and derivative trading in cryptos.
Why Use Leverage?
The use of leverage is to enhance position size. It is the main motive of traders. While brokers or exchanges provide it with the motive to help traders and earn from it.
In addition, leverage increases the liquidity of the capital. That’s the reason why many traders rely on leverage, except for the high loss it can incur. The position and capital could be double or triple, and much more.
A good way to earn from market investments is if traders’ predictions are correct.
How does leverage Work?
Leverage use is quite simple. Traders deposit funds in their trading accounts. It is necessary that funds are available in the account to access leverage trading. The amount in the account is the collateral.
The amount of collateral is based on the leverage ratio to be used or the position to open.
For example, Lucy has $1000 in her trading account. She wants to buy Bitcoin, and for that, she uses the leverage facility of a broker. The leverage ratio of 1:200 is applied to double the investment by 200.
The available amount becomes $200,000. It is a sufficient amount to buy Bitcoins. She buys 10 Bitcoins to trade.
In this manner, leverage is applied to borrow capital. However, traders have to be alert to the risks involved with leverage.
It is easy to use, but the chances of loss also double. If a trader earns from the trade, it’s overwhelming, but if the opposite happens the trader is a huge loss.
Traders can apply leverage on both short and long-term trades.
Example of Long-Term Position
Let’s continue with the same example discussed above. Lucy wants to trade in a long-term position. She buys 10 BTC with a 1:100 leverage ratio. If the collateral amount is $1000, it will become $100,000.
If the price in the time period increases, then Lucy will enjoy double profits. But, if it drops, then the loss will also be double for Lucy. She will have to pay the broker the leverage amount.
Traders can therefore use tools and trading techniques to predict market changes. With that, they can invest correctly using the market information.
Example of Short Term Position
In the short term, trade the position with leverage for a day, a few hours, or a maximum of a week. The investment is quick, and so is the result. Traders can invest in the short term with leverage.
The process is the same, but the trade ends soon. Traders, if they earn, will have nothing to pay to the broker except the margin amount. But, if there’s a loss, traders will pay double the amount of the leverage.
It is, therefore, a risky tool that brokers and exchanges have to offer.
The cryptocurrency market is volatile. But, it offers several market opportunities for traders. Moreover, it is considered the future of the financial market. Many traders invest in the market.
With leverage, they increase their position to have large profits. But the risks of the trade are also doubled. This makes it a risky investment. Traders can use it according to their needs with good market research and prediction.