Steemit Crypto Academy Contest / S13W6: Leverage in cryptocurrencies

When a cracker tries to open a nut with hands then it may takes time and may be he can't be able to crack it. But when he will undergo the process of Leverage , he can open it just by applying little efforts.

Reason is that he applies small amount of force at the handle. In returns, it exerts a large force on nut that allows him to crack it. The nutcracker multiplies his force to make it easy to crack the nut's shell. There are so many other examples to understand this term.

In the world of crypto, there are many exchanges provide leverage. That allows traders or investors to borrow some funds to increase the position. For Instance, A trader with 1$ who has leverage of 10x can control a position equivalent to 10 Bitcoin. For every dollar 💰💵 invested, trader can control $10 worth of an asset.

If we have 1$

Leverage of 10x = 10$
Leverage of 40x = 40$

If you wanna start a trading , it would be easy for you by understanding this concept of Leverage in Crypto currencies.

Leverage is a financial term. It refers to the practice of using borrowed funds to increase the potential gain. It allows traders or investors to control larger positions in an asset initially investment would typically permit.

It refers to amplify the potential returns of an investment. let me say , it magnifies both potential gains and losses by using borrowed funds. For instance, there is an example that illustrates the leverage in cryptocurrency trading specifically STEEM against USDT.

Let's suppose I'm a trader and wanna start my trading with the initial capital of 10,000 USDT and I wanna decide trade with STEEM of 10x leverage.

Initial Capital = 10,000$
Leverage = 10x

With 10x leverage, I can control a position size of ten times larger than capital. It indicates that my initial capital can be leveraged to control a position of worth of 10,000$ in STEEM. If we suppose, 1$ is equal to 1 Steem. Then without leverage, I can buy only 10,000 STEEM.

With 10x leverage, I can buy 100,000 STEEM. Because I already explained that every dollar invested , I can control 10$ worth.

As I said earlier that it's a financial process in crypto trading using borrowed funds to amplify the potential returns. Definitely, it allows traders to control a larger positions with lower capital.

It works on a mechanism of borrowed funds. If a trader has 100$ and he uses leverage of 10x, he can control a position worth of 1000$. It amplifies both potential gain and loss. For example 1% price movement in an asset can result in 10% gain with 10x leverage on initial capital.

It also increase the risks of loses. If market moves against the trader's position there may be loss of 10 %. So , a trader must have understanding about dynamics. Risk management strategies are best.

There are margin requirements as well. Traders are supposed to maintain a minimum amount of funds in the account that are known as "Margin". When is the position is unfavorable traders may face a margin call. This is how leverage works in crypto trading.

Leverage is used in cryptocurrency for so many reasons. As we know, crypto market is highly volatile. It allows traders to access large positions with small capital. It is used to maximize the potential profits in trading. In which traders control larger positions with lower capital.

This practice always attracts traders. Because traders seen to capitalize on the price movement. The borrowed amount act as amplifier for both profit and loss. Markets are volatile. Therefore, leverage allows traders to amplify the trading power.

Leverage provides an opportunity in which small price fluctuation can be leveraged for potential large profits. It is used because it enables traders to enter in the crypto market with lower capital requirements.

Let's consider, I have 12,000 USDT in steem with the leverage of 10x. It indicates that I can control long position of 120,000 USDT.

Initial Capital = 12,000 USDT
With the leverage position of 10x = 120,000 USDT

Let's open a long position on Steem by given percentage.

• For the 45% Rise

45 % rise indicates profits. So , let me share formula here. By using this formula we can easily calculate profit or loss.

Here,

∆% = 45 %
Investment = 12,000 USDT

After applying the formula,

Profit = 45% x 120,000 USDT
Profit = (45/100) x 120,000 USDT
Profit = 0.45 x 120,000 USDT
Profit = 54,000 USDT

If the price of STEEM rises by 45%, it wil result as 54,000 USDT.

Profit = 45% x 120,000 USDT = 54,000 USDT. ( Without loan interest)

If we find out net value of profit , we'll use this formula.

Here,
loan interest = initial investment x % of leverage.

Net profit = 54,000 USDT - (12,000 USDT + (12,000 USDT x 0.1)) = 39,600 USDT

• For the 15% Drop

15 % drop indicates loss. So , let me share formula here. By using this formula we can easily calculate profit or loss.

Here,

∆% = 15 %
Investment = 12,000 USDT

After applying the formula,

Loss = 15% x 120,000 USDT
Loss = (15/100) x 120,000 USDT
Loss = 0.15 x 120,000 USDT
Loss = 18,000 USDT

If the price of STEEM drops by 15%, it wil result as loss of 18,000 USDT.

Loss = 15% x 120,000 USDT = 18,000 USDT. ( Without loan interest)

If we find out net value of loss , we'll use this formula.

Here,
loan interest = initial investment x % of leverage.

Net loss = 18,000 USDT + (12,000 USDT + (12,000 USDT x 0.1)) = - 31,200 USDT

Negative sign here indicates "loss".

Therefore, It indicates that I have made a net loss of 31,200 USDT.

My opinion is concerned here , leverage increases the profits of traders in a very short time even holding lower capital. When market position is unfavorable then traders have to face high risks and great loss. The reason is that market is highly volatile. Therefore, traders have to face high risks.

Leverage has so many advantages in crypto trading. It allows traders to control larger positions with smaller amount of capital. Due to amplifier gains, it offers the higher returns on the investment. It has flexibility and gives more opportunities for traders in larger trades.

Meanwhile, leverage has so many disadvantages. It increases the level of risks. There is possibility of losing more than the initial investment. To avoid substantial loses , traders must have a risk management strategy and proper understanding of market dynamics.

Leverage acts like a double sword. It can be significant but it caries inherently substantial risks. For this, a trader or investor must need a significant understanding of market dynamics and risk management strategies.

Now , I would like to invite my friends @steemdoctor1, @artist1111 and @suboohi to take part in the contest. And share your views on this informative topic.