What is cryptocurrency leverage?
By Oleksii Haiduchyk 1670 14 Sept 2022
Any financial goal requires the right strategy. At least you should know what and when to buy or sell. But your starting capital is equally important. The logic is simple – the bigger the trade, the bigger the earnings. Therefore, there is a rather simple, at first sight, tool called leverage.
It allows you to increase the total amount of finances you manage significantly.
Leverage (financial leverage) is a ratio of a trader’s starting position to the total amount of money to be traded after receiving a credit. Trading with the use of leverage belongs to margin trading. It is a tool that allows you to temporarily use much more capital than you currently have. It all depends on the initial sum and the size of the leverage itself.
Leveraged trading allows you to open both short and long contracts. Long positions are for the rise of the coin, while shorts are for the fall of its price. Most trading platforms offer leverage from 1:2 to 1:500. This figure is called the leverage size. It shows how many times your initial capital increases. But it’s important to know that you don’t become the full owner of that money.
For example, you want to open a long position for $1,000. You will need to deposit $100 and use 1:10 leverage to do so. The money you deposit is a margin. If a trade is liquidated, it remains at the exchange. The amount of margin depends on the leverage size and the total amount you want to use. The profit from this operation, net of commissions, goes to you.
The leverage size affects both the profit increase and the loss amount. With high leverage, a token price change by even a few percent can lead to significant losses. In this case, the trader receives a margin call – a message that your position incurs losses. To avoid liquidation of the trade, you will have to increase the amount of margin.
For example, you want to gain on the rise of a coin by paying $100 and using 1:100 leverage. Thus, you already have $10,000. If the price of a coin falls by 1% (which is the amount of the margin), the exchange will liquidate the trade and keep the margin.
Experienced traders do not advise beginners to use big leverage, and some exchanges have a maximum leverage limit for new users.
Trading with leverage is a great tool to raise capital, but only in skillful hands. You need to consider unstable market behavior and correctly choose conditions for opening a deal. Even several trades with appropriate leverage can significantly increase your profits. But do not forget about the risk. You can always start with a small amount to “become proficient” and, over time, reach trading with higher volumes.