Leveraging is a quick way to earn more when trading. With it, you can boost your trading profit by a lot. Of course, it sounds intriguing; however, it is a two-edged sword that not only benefits but also causes a nightmare for many beginner crypto traders when it is not properly managed. For this reason, you need to know what leverage is, how it works, and how to manage your risk when using it.
What Is Leverage in Cryptocurrency?
Leverage allows you to get a larger exposure to the crypto market than the amount you deposit to open a trade. It is more like using borrowed funds to open trades while providing just a fraction of the trade's full value.
Traders and investors use it to augment the amount they own in their wallets to have more capital to trade with. Leverage is given by the broker or exchange you're using, and the amount of leverage usable for trades varies from one exchange and trading instrument to another.
How Does Crypto Leverage Trading Work?
Leverage is usually represented in ratios. Exchanges typically offer leverage options between 1:1 to 1:500, and even higher. Using the leverage of 1:100 means that you can execute a trade that is 100 times (100x) higher than your initial margin. The leverage ratio for a position is determined by comparing your total market exposure with your deposit, also known as margin.
So let's say you open a buy position on BTCUSDT with $100. If the price rises by 5%, your profit will also rise by 5%, which means you will have $105. If you use 10x leverage, your position will be multiplied by ten. So if you have a 5% increase, the result will be multiplied by ten (the leverage), which means you will have 50% profit instead of the 5% you had without leverage.
On the other hand, if the trade goes against you by 5%, you will also lose 50% of that position, and if it goes against you by 10%, your position will be liquidated, and you will lose your money.
