Home Business Leverage in cryptocurrency trading: what is it?

Leverage in cryptocurrency trading: what is it?

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Leverage in cryptocurrency trading: what is it?

Leverage crypto enables users to act on the idea of “high risk, high reward.” Exchanges offer this feature so that investors with small holdings can make the most of their investments.

You can get access to a lot more of a specific asset when you use leverage, so that you are able to trade with larger quantities of that asset without having to buy it. In fact, there is no buying involved at all with leverage. Instead, you are borrowing the asset. Keep reading to learn more on this powerful technique.

What is leverage in crypto trading?

The term leverage refers to a type of loan that is used by traders to finance trades they intend to make based on the direction in which they believe the crypto’s price will move. In leverage trading, traders can borrow crypto as a means of financing any trade that they wish to make. Trading decisions should be based on research they have conducted. The use of borrowed funds in order to trade gives them “leverage”.

It is always a fact that interest is charged for borrowing assets. Different Crypto Trading Platforms allow different types of loans. The loan could give you a wide range of profit-anything from 10x to 100x.

As a result, leverage is most desirable when used in conjunction with an unstable asset. With the help of leverage, traders can take advantage of the volatility of prices, and therefore get a better deal by using leverage. Leverage is more prevalent in the cryptocurrency market due to its extreme volatility.

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It is very useful to have the leverage feature as it makes it possible for traders to trade with a lot more than what they actually own. Because of this ability, a wider audience can access trading.

How does leverage trading work?

Here’s an example of leverage trading that will help you understand how it works. Assume you want to trade ETH tokens worth $500 due to the recent Ethereum Merge and you think there is a good chance of profit. However, you only have $50 in your wallet. The 10x leverage option on a crypto exchange will allow you to use what you have to borrow funds for ETH worth $500 (that’s $50 multiplied by 10). Since the $50 can be used as collateral, you will be able to borrow 10 times as much.

The collateral given for borrowing in leverage trading is also known as “margin.”

It may seem strange that anyone would give you such a large loan for such a small margin. But they know that it all adds up in the vast leveraged trading market. There are millions of users giving the platform ₹50 margins, so that leaves the service provider with a sum that isn’t so small after all.

In a nutshell, that is how leverage trading works in crypto. However, there are many nuances to it. To engage in leverage trading in crypto, you will need a derivative. Derivatives are what make leverage trading very different from simply buying the dip and HODLing, with the hope of getting rich in the long run.

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Advantages of leverage for crypto trading

As you may be aware by now, sometimes using leverage may not be a bad idea. To summarize, leverage trading offers the opportunity to trade large positions with minimal funds in your wallet. As a result, even small movements in the market can result in substantial gains.

Through leverage, traders can invest in multiple assets via derivatives, opening many positions without sacrificing position size, since leverage frees up some money.

In addition to helping diversify portfolios, it increases the chances of making a profit.

However, you should only engage in leverage trading if you are a seasoned trader.

 

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