Leverage

November 21, 2023 - Around 2 mins mins to read

Understanding Leverage

Leverage is a term used to describe a loan provided by a broker on an exchange during margin trading. The purpose of this loan is to increase the amount of funds available for trades.

The concept of leverage is closely connected to the amplification of a trader’s position and potential profitability through the loan.

In addition, leverage can also refer to the amount of debt that a company borrows to finance its assets.

Investors use leverage to boost their purchasing power in the market.

For instance, let’s consider a $100 position in Bitcoin. If a trader’s position is increased by a leverage of 50x (expressed as a ratio of 1:50), the $100 BTC position would now be valued at $5,000.

The initial amount that the trader possesses is called margin, which acts as collateral in case the cryptocurrency or asset experiences a decline in value.

Margin trading is a highly risky practice. While it can amplify profits, it can also magnify losses. This strategy can be applied to both long and short positions.

Shorting is an investment technique used by traders who anticipate a decrease in prices. On the other hand, going long is a strategy employed when the price of a cryptocurrency is expected to rise.

The level of leverage available to an investor depends on the chosen trading platform and the specific digital asset they want to gain exposure to.

Some countries have implemented measures to restrict margin trading due to concerns that it may result in significant losses among inexperienced investors.

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