April 17, 2024

What Is Leverage in Crypto Trading?

3 min read
crypto trading

Leverage is a trade that might seem confusing to you, especially if you are new to it. But if you are thinking about using it, then before that make sure that what it is and how it is capable of working. In this blog, all the information about leverage trading in markets is given, but a large part of the given information is valid for traditional markets as well. To get started with trading cryptos, visit the official website of https://bitindexai.biz/.

Leverage in Crypto Trading

Here first we will know what leverage is, its main meaning is to use borrowed capital to start trading with cryptocurrencies or other financial assets. Leverage helps you to increase the buying or selling power so that you can trade using more capital in your wallet than at present. In addition, you can borrow up to 100 times your account balance regardless of the exchange you trade in crypto on. The ratio is used to describe the amount of leverage, which can show how many times your starting capital is multiplied. You can also trade various crypto derivatives through leverage. Leveraged trading which if we look at the common types includes things like leveraged tokens, margin trading and futures contracts.

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How is leveraged trading able to work?

If you want to use leverage and borrowed funds to start trading, you must have funds in your trading account. When you provide initial capital, it is known as collateral. However, the collateral usually depends on the total value of the position and the leverage. Which you utilise and want to open. Also, it is important to maintain the margin limit after the initial margin deposit for you to sustain your trade.

Usually, even if a market situation occurs that is exactly opposite to your position, causing the margin to fall below the maintenance limit, you will need to deposit more funds in your account to protect yourself from such liquidations. Leverage that you can start within both long and short positions. Where to initiate a long position is to expect the price of an asset to rise. Conversely, the initiation of a short position refers to the belief that the asset’s price may decline.

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Leveraged long position

Here we will show you a leveraged long position as an example. Let’s say you are looking to open $10,000 worth of BTC on a long position with 10x leverage. This means that $1,000 will be used by you as collateral. In the meantime, if the price of BTC increases by 20%, you get a profit of $2,000, which is more than the $200 you would have made if you traded with your $1,000 capital without using leverage.

Leveraged short position

Other than this, given the instance of a leveraged short position, if you consider opening a short position of around $10,000 on Bitcoin with 10x leverage and to do this, you would need to borrow bitcoin from someone else and sell it in the market at a price that would exist at the time. 

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Utilizing leverage in crypto trading

As we mentioned earlier, generally, leverage is used by traders when they want to increase their potential profits and position size. But as mentioned in some of the examples above, leveraged trading can also be a risky one. Furthermore, leverage is used by traders as one of the main reasons they want to increase the liquidity of their capital. Example- If you want to maintain the same position size you can use 4x leverage with less collateral.

You can also use another part of your money in any other place. Which includes things like investing in NFTs and providing liquidity.

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