The term leverage, or leverage in English, defines a financial instrument that allows investors and traders to control a significantly larger position in the market than their actual capital. Basically, you use funds borrowed from a trading platform (stock exchange) to amplify your buying or selling power.
How does leverage work?
Imagine you want to buy $10,000 worth of Bitcoin, but you only have $1,000 in your account. With leverage, you can use that $1,000 as margin (collateral) and borrow the remaining $9,000 from the exchange to open the $10,000 position.
Leverage is expressed as a ratio, for example, 10x (ten to one), 50x, or even 100x.
- If you use a leverage of 20x, it means that for every $1 of your capital, you can control a $20 position. With $1,000 you could open a $20,000 position.
- If you use 100x leverage, with $1,000 you could open a position of $100,000.
The role of margin and liquidation
To use leverage, you are obliged to deposit a certain amount of money as initial margin. This serves as collateral for the loan.
The most important concept to understand is liquidation. Crypto markets are extremely volatile and leveraged trading magnifies both profits and losses.
- If the market moves against your position, your accumulated losses will begin to erode your margin.
- When the value of the position falls to a point where your margin is no longer sufficient to cover potential losses, the exchange will issue a margin call, requiring you to deposit more capital.
- If you cannot or do not deposit additional funds, your position will be automatically liquidated. This means that the exchange will forcibly close your position to recover the money borrowed, and you will lose all of your initial margin (and sometimes even more, depending on volatility and account type).
Advantages of using leverage
- Amplify profits: the biggest advantage. A small price move in the favorable direction can result in significant profits relative to the capital invested.
- Capital efficiency: Allows control of large positions with relatively little capital.
Major risks
- Amplification of losses: Just as leverage amplifies profits, it also amplifies losses. A small unfavorable price movement can lead to rapid loss of all capital.
- Liquidation risk: This is the biggest danger. Unexpected volatility or a sudden market movement can quickly liquidate you.
- Additional costs: Many platforms charge interest or financing fees on borrowed funds, especially for positions held overnight.
- Emotional impact: Increased risk can lead to hasty and emotional decisions, damaging your trading strategy.
Conclusion:
Leverage is a powerful tool that can maximize returns, but comes with exponentially higher risks. It is a tool for experienced traders who fully understand market mechanics, risk management and the volatility specific to cryptocurrencies. For beginners, leveraged trading is generally strongly discouraged.
Looking for up-to-date information about a cryptocurrency’s price and trajectory? You can find it on our specially designed cryptocurrency price list page.