Crypto Glossary

Posted on September 13, 2021 in
Glossary

Leverage

Leverage is a loan made by a broker on a stock exchange during margin trading in order to increase the amount of money available for use in the deal. With leverage, we are referring to the amount by which a trader’s position and, consequently, profits have increased as a result of the loan. It is also referred to as the amount of debt that a company borrows in order to fund assets. In order to boost their purchasing power in the market, investors employ the usage of leverage.

What is leverage?

Leverage is simply borrowed funds that allow a trader to raise the size of his or her position as well as his or her market exposure, hence increasing his or her profitability. If a position is expanded by 300 times (1:300) leverage, a 300 Baht Bitcoin stake will grow to be as large and profitable as a 90,000 Bitcoin one, and vice versa. 

As an example, the initial investment of 300 Baht by a trader is known as the ‘margin’, which serves as collateral if the market price of an asset moves in the opposite direction of the trader’s expectation. It is possible for a trader to lose only the amount of available margin in a leveraged transaction; however, as you can see, this amount is insignificant in comparison to the potential profits if the trade is successful.

Trading with leverage

Margin trading using leverage enables traders to open both long and short positions, which gives them the opportunity to benefit regardless of whether the market is rising or decreasing. The trader will close the position once the price of the asset that is being traded reaches their target, which could be either above the buy price if they are long or below the selling price if they are short. After this, the trader will calculate the return on investment by the difference between the open and close prices.

Is it good to trade cryptocurrencies using leverage?

Some analysts contend that while margin trading is beneficial for increasing the price of cryptocurrency assets, other analysts believe that the sheer level of risk associated with margin trading dramatically inflates volatility in the cryptocurrency markets. However, because of this, some analysts argued that when the price of Bitcoin dropped in the middle of May, it was good for the leverage to be rinsed from the BTC markets. 

Many market speculators might believe that crypto whales utilize margin trading as a method to deliberately manipulate markets. Leverage is a significant force in the Bitcoin markets, no matter whether or not it is being intentionally applied. It may still play a crucial but hidden function in crypto markets as long as high-risk platforms are not regulated.

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