Cryptocurrency is a digital currency that does not rely on payment; it is created with the help of unique algorithm-encrypted code. If you think of trading using cryptocurrency, you must know about leverage. It is a term used to borrow a certain amount of capital to make enough trade. You can visit the official platform through which crypto owners trade several other currencies.
Moreover, the help of leverage can strengthen the user’s trading power, which helps to deal and earn more lucrative, so if you have a lower initial investment, don’t worry that with the help of leverage, you can earn enough capital. So, in this article, we will explain the in-depth importance of leverage and how it can multiply your profit and reduce the risk of loss when you are making deals in the volatile crypto world.
What Does Leverage Mean for Crypto Trading?
As mentioned above, leverage lets you borrow capital to buy and sell financial assets. It helps to boost the power of trading, which helps you earn more capital compared to the one you have known in your wallet. The real question is how much you can borrow depends on the crypto exchange; you can borrow 100 times your current account balance.
There are multiple ratio sets; the number of leverage ratios is 1:5 (5x), 1:10 (10x), or 1:20 (20x). This ratio defines how many times your initial amount increases or multiplies. For instance, if you have 100 dollars in your account balance and produce 500 dollars in Bitcoin, you need 5x leverage to buy the $ 500 bitcoin. The same goes for 5x and other ratios.
How Leverage Works w.r.t Trading?
First, you need to deposit some funds into your current trading account before you go on for leverage and borrow funds. The initial installment you have is termed collateral, which determines the leverage and total value you need, which is often termed the margin.
Let’s say you invest 1000 dollars in Ethereum (ETH) and need 5x leverage. Therefore, the margin would be around ⅕ of 1000 dollars, meaning your trade account should have 200 dollars as the collateral amount. Similarly, if you would go for a higher margin, like 10,20 or so, the required margin would be less, but what is terrible about leverage is that the higher the leverage more risk will be associated.
Now the next thing is to look after the margin threshold, which is very important for trading. If the market trading works differently than you planned and a time comes when the margin falls beyond the maintenance margin, then it is time for you to add more assets to avoid any liquidation.
Leverage can be utilized for both positions, long-term and short-term positions. When you are aiming for the long-term position, it means you are aiming for the price to surge, whereas, in the case of a short-term position, you believe the current price of the assets will go down, so here we have listed the examples for short and long positions.
Leveraged long position
For instance, you have to aim for a long-term position with an initial 10,000 dollars with 1x of leverage. That means the collateral amount that will be used will be 1000 dollars. Now, if the price surges to 20%, you will earn a profit of 2000 dollars minus the extra fees. It means that if you invested 1000 dollars, the profit would be $200 without leverage.
Now, if the price drops to 20%, the exact amount you earn would be lost. Since the price drop beyond your collateral amount may cause liquidation. Hence, to avoid it, you need to add funds to your wallets to enhance the collateral again. This will be communicated to you in the form of an email.
Leveraged short position
Similarly, you want to pursue the short position for the same amount,10000 dollars, with BTC with 10x leverage. In that case, you will need to get BTC from another party and sell at the current market cost, which will turn the collateral into 1000 dollars, so for 10x collateral, you can sell ten thousand worth of BTC, but if your BTC price is 40000 dollars. You borrowed 0.25 of the BTC and then sold it, and in a later year, the price dropped to 20%, which means now you can buy the BTC for 8000 dollars, giving you 100 dollar profit.
Leverage is a great option and technique; you earn a lot of capital with a short investment. All you need to do is trust the process and do some research about the different types of leverage positions and how it works, and the article has listed some of the critical points and formulations that will be helpful for you.