Leverage in crypto trading involves utilizing borrowed capital to execute trades with greater buying or selling power. It enables trading larger amounts even with a small initial capital by using it as collateral. While leverage trading can amplify potential profits, it also exposes traders to high risk, especially in the volatile crypto market.
Leverage is represented as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x), indicating the multiplier of your initial capital. For instance, with $100 and 10x leverage, you can trade as if you had $1,000. However, higher leverage levels entail increased liquidation risks.
Consider a scenario where you want to open a $10,000 BTC long position with 10x leverage, using $1,000 as collateral. If BTC’s price rises by 20%, you would earn a net profit of $2,000 (minus fees), significantly more than the $200 profit without leverage. Conversely, if BTC’s price drops by 20%, your position would incur a $2,000 loss. Since your collateral is only $1,000, a 20% drop would trigger liquidation, resulting in a zero balance. The specific liquidation threshold varies depending on the exchange used.
To avoid liquidation, additional funds must be added to increase collateral. Typically, exchanges issue margin calls before liquidation occurs, notifying users to add more funds.
It is essential to exercise caution, avoid excessive leverage, and start with small amounts while gaining experience in leverage trading.
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