What is leverage in cryptocurrency trading?
Leverage is a commonly used term in finance prevalent in the crypto trading world. What it refers to is the concept of borrowing capital for your initial investment so you can get better returns.
It essentially defines the ratio between profit and risk for any investment.
The prime purpose of leveraging is to enhance the chances of getting higher returns for an investment. However, with the higher options of profit comes higher risk. That’s why you must manage leverage efficiently to grow as a trader.
Let’s learn about leverage and how it works in the crypto world.
What is leverage in trading?
Leveraging is a way to increase your buying and selling power by borrowing capital from a broker or exchange. The broker provides you with the borrowed funds, and you have to return them with interest regardless of whether you make a profit.
So, when you have increased trade power because of borrowed funds, you risk higher losses. Therefore, maintaining a balanced ratio between risk and profit is crucial for leveraging.
In crypto, you can leverage by setting a certain margin or amount as collateral. It is also known as margin trading, where you can borrow funds and put higher collateral to increase your profit.
How does leverage work in crypto?
As we continue to ask what is leverage in trading cryptocurrency, we must understand how it works.
Suppose you are doing leverage or margin trading in crypto with a trade potential of around $1,000. In that case, the broker may offer leverages of 10x or 10:1. This means your initial trade value will reach $10,000 because of the borrowed amount.
So, if you buy a coin with this investment and its price rises by 10%, you can make a profit of $1,000. If the coin's price goes down, you will have to bear a loss of $1,000. That's why leverage trading is a risky proposition in crypto, and you must proceed with due diligence to ensure that you do not have to bear any significant losses.
## Benefits of leverage trading
Here are some of the benefits of leveraging in crypto:
- Allows you to make larger profits as compared to your original trading position.
- You can avail yourself of more trading opportunities.
- Small price movements may not affect your profit.
Nevertheless, there is an amplified risk of losses. Moreover, if you fail to meet the margin call, you have to liquidate, and the broker, to cover your losses, can sell your assets.
## Final thoughts
Leveraging is an effective way to increase the percentage and chances of profits. You can borrow money from brokers and make more significant investments through this.
But this technique also involves higher risk, so it is advisable to follow risk management strategies.
Author: Wasay Ali
Wasay Ali is a versatile professional writer with global experience and a background in mechanical engineering and social science. He is adept at crafting news and informational content for the crypto space and has experience writing for other niches. He is a professional SEO content writer who has worked with several digital marketing agencies and clients in the US, UK, Pakistan, and Europe. He is a dedicated volunteer and enjoys reading, writing, poetry, and going to the gym. He is an INFJ-A personality type dedicated to positively impacting the world. Wasay has a passion for writing as it allows him to express his creativity, share his knowledge, and connect with people worldwide.