At first, we want to note that using leverage is a prime example of advanced trading, which requires particular skills and knowledge, while trading on the spot is rather investing, which provide lower risks and suit newbies. For better understanding, let’s get familiar with the leverage definition.
What is leverage?
Leverage is an investment technique of using borrowed money, precisely, the use of different financial instruments or borrowed capital to maximize an investment’s potential return. Also, leverage may refer to the amount of debt a firm uses to fund assets. You should keep in mind that leverage will also multiply the potential downside risks in case the crypto coin of your choice goes down.
Advantages of leverage trading
Don’t limit yourself with your deposit on the spot, borrow money to increase your profit. For example, by going long with leverage x2, you can double your expected profit.
On margin and futures trading you have an incredible opportunity to earn even on a bearish market when everything is falling when everyone is ruled by fear. Go short with any leverage you want within the cryptocurrency exchange platform’s capabilities, but consider the risks, which we explained below.
Diversify your trading portfolio by trading on different platforms using leverage. Going short will be a great solution to cover losses caused by a liquidated long position.
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How to buy Bitcoin with leverage? Suppose you want to buy two BTC with the actual price of $30 000, but have not enough money. And you decided to go long with the 2X leverage and buy two Bitcoins, expecting it to rise. After some time, Bitcoin price goes up 10%, and your deposit value turned to $66 000. You should subtract the borrowed money ($30 000) to calculate your reward – $6000, without deducting fees. Without the leverage trading feature, your earnings would be two times lower.
On the other hand, if the market goes in the wrong direction, and Bitcoin’s price goes down to $25 000, the overall cost of your funds is now $50 000, but you still have to pay back $30 000 to the exchange. The bad news is you’ve lost $10 000 of your own funds. That’s why leverage trading is dangerous.
In summary, despite the pros of leverage trading, you should realize that your whole deposit can be burned quickly in volatile markets, making this technique unsuitable for newbies.
Despite the risk, while using high leverage, you can become rich only after one successful order, but you should consider proper risk management, which will help you to keep your assets safe and nerves healthy. We prepared for you some leveraging cryptocurrency must-have tips for dummies:
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