What is leverage

Crypto for Advanced
> 2 min. read
What is leverage

Using leverage means, that you open position, or you trade cryptocurrencies which has bigger nominal value as your account balance. For example, using leverage 1:100 means that with every 1 dollar you have on your account, you can buy something worth 100 dollars. It is important to mention, that with using leverage you can increase your potential profit as well as deepen your potential loss.

Buying power with leverage = Leverage x Balance

If your trades are successful, you can enhance your buying power and possible earnings by using leverage or margin trading. Margin trading allows you to borrow money and trade larger sums than you could if you simply used your own money. Margin trading, on the other hand, raises the danger of losing all of your money or being liquidated. When trading with borrowed funds, there is an inherent risk. Margin trading in the volatile crypto markets, however, dramatically increases risk, thus crypto traders must exercise extreme caution and understand how to use hedging and other risk management measures. Even if you become an expert at spotting market trends and performing technical analysis, you will still be at danger.

To better understand how leverage works, let us check the example below.

Trader has 1000 USD on his account to invest. Trader is interested into buying a crypto coin, which costs 100.000 USD and is out of his budget. Company Bitmarkets offers leverage 1:100. Therefore, traders buying power is 100.000 USD and he can afford to buy 1 coin at that price.

Buying power = 100 (Leverage 1:100) x 1000 (Balance) = 100.000 USD

However, 1:100 on Bitmarkets is the highest available leverage. Trader can decide to use smaller leverage, for example 1:10. In that case, his buying power for a coin would be:

Buying power = 10 (Leverage 1:10) x 1000 (Balance) = 10.000 USD

The higher the leverage, the bigger risk. However, it also brings potential for higher profit. Every trader should decide for himself, what kind of risk he is willing to take and what kind of trading suits him the best.

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