Leverage is a brokerage service provided to traders to increase their own funds when conducting cryptocurrency trades. This allows a trader to enhance their buying and selling power. Using this tool, they can significantly boost profits, but it also comes with a high risk of losing more of own funds.
Leverage is denoted as a fractional number, for example, 1:10, meaning the broker increases your funds by 10 times. It's worth noting that to use leverage in a trading account, a trader should provide collateral. For instance, if the total trade amount is $1000, and the leverage ratio is 1:10, the collateral should be $100. Collateral is also referred to as margin.
Leverage can be applied in both long (expecting the asset to rise) and short (expecting the asset's price to decrease) positions.
Despite its obvious advantages, there's a factor that also needs to be considered, which is the risk of liquidation.
When trading with leverage, a trader needs to maintain a margin threshold for trades (maintenance margin). This means that if the market moves against the trader's open position, and the margin falls below the maintenance threshold (initial deposit), the trader must deposit the corresponding amount. Otherwise, the broker may liquidate the leverage.
Leverage is an excellent tool in cryptocurrency trading. However, it's essential to remember that these are borrowed funds that need to be repaid. Before using leverage, make sure you have sufficient experience in margin trading.