What is Leverage and why do traders use it while trading?

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Gradually people are getting aware of the financial market and cryptocurrency.

After the worldwide pandemic — Covid-19 — global financial markets and digital currency surged rapidly and recorded unexpected growth in a short time.

It all occurred because of leverage in the financial market and crypto trading plays a major part to maintain liquidity in the market. 


Leverage provides the borrowed money to execute traders in the crypto market. This also works as real money for only trading purposes even if you have a small initial capital.


It doesn't matter if you are a beginner or skilled trader or investor, but it's subject to high risk. Leverage is a boon for every individual who participates in crypto and other financial trade. 

Leverage:

Leverage refers to using borrowed money while trading to increase buying and selling power. It's a vital weapon of traders to make huge returns on a daily basis instead of having small capite.


In cryptocurrency trading, people can amplify their position sizing and get eligible to trade larger amounts. 


For example, if you are a beginner and you start trading only with $100 in the early stage. If you trade in the spot market without leverage then the profit will be small and risky too.


Conversely, if you activate leverage trading, you can take short and long positions more than your own capital. 


Practically every crypto exchange provides leverage on users' collateral money to amplify the buying and selling power only on minimal fees.


It helps a lot to maintain the liquidity in the market. Exchanges offer amounts in ratios like 1:5 (5X), 1:10 (10X), 1:20 (20X), and above it. Moreover, few exchanges provide 100X margin on collateral money but it's too risky. 


In simple terms, if you have $100 in your wallet and you take 5X leverage that means you can trade $500 on your directional view.


Notably, the cons are everywhere. No matter how good something is? Your account is being liquidated if the market goes against your view, at times you need to pay maintenance margin. 

  • Maintenance margin: when the crypto market goes against your directional trade and you start to face losses in your portfolio. You need to deposit more funds into your trading account to avoid being liquidated during the live market. Therefore, don’t use above 1:10 (10X) leverage if you are a beginner.

Is Leverage for both-Long and Short Position?

Leverage gives wings to make any long and short positions during live markets.


Like if your collateral money is $100 and you already amplify it through a 10X margin, then you can buy $1000 worth of Bitcoin.


If the BTC price moves up 10%, you will earn $100, which is higher than what you would have made based on your $100 capital without using leverage. 


But when you use more than 10X leverage, you may face trouble if the market goes against you.


Like, if you long $1000 worth of Bitcoin on $100 capital while using 10X leverage, and in case, BTC drops 10% after executing your trade, your account will be liquidated. 


So take rise as per your capacity and gradually increase the growth of your account while using leverage.

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Disclaimer:
This information is for educational purposes only and does not constitute investment advice. No person should rely on it to make any investment. Investing carries risks, including the loss of capital. All opinions expressed are subject to change without notice. Past performance is not indicative of future results. Always seek the advice of a licensed investment professional before making any investment.