In the world of cryptocurrency, one of the most common terms to come across is ‘leverage’. In this context, leverage refers to the amount of money you can borrow from a broker in order to make a trade. Leverage is an important concept to understand because it can potentially amplify your gains and losses. It’s important to note that leverage only magnifies profits and losses, but never adds anything to them.
Leverage is a double-edged sword in the world of crypto trading. On one hand, it can amplify your gains and help you maximize your profits. On the other hand, it can amplify your losses and help you lose more money than you ever dreamed possible.
In this article I will explain how to use leverage effectively so that you can make the most out of it and avoid getting burned by it.
What is Cryptocurrency?
Cryptocurrency is digital currency designed to be secure and, in many cases, anonymous. It is a form of electronic cash. Cryptocurrency uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments.
What is Leverage in Crypto?
In the world of crypto trading, leverage isn’t just a tool to boost your profits – it’s a way to do something that’s not possible in traditional markets. In traditional markets, you can only buy assets at prices you can afford. When you use leverage, though, you’re able to make trades that are much bigger than any amount of money you have on hand.
In the crypto world, this is especially useful when looking at an asset’s price in relation to its marketcap. It’s easy for one coin trading at $0.01 to skyrocket up 10x or even 100x when there’s only $300 worth of coins available for purchase – and there are many other coins that could be considered undervalued that aren’t easily accessible thanks to their low supply and high demand.
Leverage lets you take advantage of those kinds of opportunities by allowing you to invest a percentage of a larger amount into an asset with a small marketcap. The most common kind of leverage comes in the form of margin trading on crypto exchange like Kucoin, Poloniex, Bitfinex and Kraken. On these exchanges, you can borrow money from other traders in order to buy more assets than you normally would be able to with the funds on hand.
Pros and Cons of Leverage in Crypto
Here are some reasons why leveraging your investments is a good idea:
It expands your buying power
Some people leverage cryptocurrency trading by using portfolio margin trading, giving them extra buying power using borrowed funds. This allows the trader to effectively employ a larger amount of capital than they actually have on hand.
It boosts ROI (Return on Investment)
If you have some money to invest right now, though, then consider using leverage to boost your ROI by investing more than you can afford on your own. This way, even if the market crashes tomorrow and takes a big chunk of change out of your portfolio, you still get a nice chunk of change in return that more than makes up for the initial investment.
It provides options for quick profits
While there are plenty of benefits to trading crypto assets, the most obvious is that you can make a huge amount of money in a very short period of time. That’s because there’s a lot of leverage available to traders, which means you don’t have to put up a lot of your own money to make big gains. Even if you’re not an expert, you can buy bitcoin or other altcoins at their current market price and sell them when they go up.
It gives you options for protecting yourself from loss if the price drops.
If the price goes down after you buy your cryptocurrencies instead of selling it at a loss and incurring potential financial hardship as a result, you can simply keep it and wait for the price to go back up.
With the volatility of BTC, SOL, ADA, SWEAT price and other cryptos, leverage lets you put your money into positions where it can grow without risking anything at all.
The cons however are as follows:
If you’re trading on leverage, you can make huge gains when the market moves in the direction that you predicted—but if your prediction is wrong, any losses are multiplied by the amount of leverage used.
Risky for Inexperienced Traders
One of the most important things to know about trading with leverage is that it’s incredibly risky—it’s not something beginners should ever do. The reason is that even small price movements can wipe out your entire investment or turn a profit into a loss in just seconds.