Steemit Crypto Academy Contest / S13W6 - Leverage in cryptocurrencies.

Assalam O Alaikum

Hello Steemians! Well come to my post. How are you all? I hope that you will be doing well. I'm also fine and enjoying my day. Today I'm here to participate in this Steemit Engagement Challenge Season 13 Week 6 in the Steemit Crypto Academy. The topic of this challenge is about "Leverage in Cryptocurrencies". So let's start without any more delay of time.

---

Canva

---

In your own words, what do you understand by leverage?

Leverage is derived from English which means borrowed capital. There are many examples of leverage in daily life. If you want to a car and you are low in balance but have to buy. Now you will borrow remaining amount from bank and bank will charge some amount as a commission. The amount you borrowed from bank is known as leverage.

Leverage is the protocol of investment in which borrow a specific amount of capital in order to get more profit and get a position with minimum of own leverage is mostly now a days used in cryptocurrency most specifically in future trading. Now let's have a example of future in order to understand leverage more appropriately.

For example:

If a person named Zeeshan wanted to get a position in specific coin like steem and he requires minimum of ten dollars but he has only six dollars. Now he need four more dollars to get position. From here leverage' s protocol started. If if he picks 10x it means that his investment will become 10x and profits are also 10x more importantly losses will also become 10x.

The most thing about leverage is it provides financial support when you are running short in your funds it boost you funds and bring you into specific position which could be turning point if go according to market movement not against the market. When you increase the leverage risk factor will also rise.

Explain how leverage works?

Now I will discuss with you guys how leverage works. The mechanism of leverage is quite simple you just need to select the leverage for example 10x ,20x etc. But the mechanism behind this is quite complicated. There are many things which could be keep in mind before selecting leverage. Because I have mentioned before if there are high rewards in case trade goes in your favour then there will be high risks of losing your funds, which is terribly destructive.

Leverage works on the principle of borrowing capital from others to amplify your funds. This can boost or hinder your funds. If you want to increase your funds ten times then there should be the possibility of ten times loss. Leverage allow us to make a control over a longer position with the help of low amount.

Why is leverage used in Cryptocurrencies?

The most thing about leverage is it provides financial support when you are running short in your funds it boost you funds and bring you into specific position which could be turning point if go according to market movement not against the market. When you increase the leverage risk factor will also rise.

There should be complete risk management before taking any trade. There should be some questions which you asked from yourself before any trade. How much loss you can bear? At which point you close your trade in case of profit? At which point you set stop loss? After that you take a trade and must know the market trend.

For example;

A trader named Zeeshan has total capital 350$.He took a position in coin named steem. He set leverage of 20x.After market analysis he take Long position (when a trader take buying position such position is known as long position). The mistake which he made is that there is complete absence risk management. He had not set stop loss. He had not set his profit ratio. Due to these reasons that trader loss all his money and left empty handed at the end. He was liquidated.

The new question arises what is liquidation?
When the price of specific coin decreases to such extent that your loss becomes equal to the amount of your wallet and require more funds. If you don't add more funds your position will be closed and your wallet become zero. As a trader I use use maximum leverage which a specific exchange provides. I have lost my money lots of time due to mis management of risk factors. I would suggest you to use minimum leverage and hold healthy amount in your wallet.

You should mange your greed also. A well known proverb is "greed is curse". The most important thing about leverage is that it looks like shining star but not all the time.

If you want to open a long position and you have 12,000 USDT in Steem and a leverage of 10x. Explain if the price of Steem rises by 45% and then explain if the price drops by 15%. Give your own opinion.

Condition 1:

• Total Steem in USDT = 12000$
• Leverage = 10X
• Total Amount = 10 × 12000, Will be = 120000$
• Margin = 12000

If the price Increase by 45%;

• Then it will be = 45% × 120000$

• Profit will be = 45/100 × 120000

• Profit is = 54000$

---

• Condition 2 ;

If the price drops by 15%;

• It will be = 15% × 120000

• By Calculating = 15/100 × 120000

• The loss will be = 18000$

---

Note; Both these conditions are different so that is why we can't deduce a net gain of profit. More ever the account will be liquidated after reaching this stage.

---

Mention the advantages and Disadvantages of leverage

---

Advantages

---

• Leverage can increase your returns this means when your trade is in your favour your assets are increased to multiple times.

• Leverage can provide you the opportunity of making rapid increase of your funds This means you can earn money at a very high rate . You can become millionaire in only a few seconds or minutes. This totally depends upon your luck and you analysis.

• Leverage can provide you a massive profit in a very short time. Your profit can be maximize even using small capital. This is most captivating thing about leverage and more people tend to use it.

---

Disadvantages

---

• Leverage can increase your loss in case of wrong trade and you will loss everything. Leverage is the worst thing which destructs your assets just Infront of your eyes and you just seeing and don't do anything.

• leverage can be proved fatal in terms of your funds. This is true because leverage is not good when you are going against the trend and you are liquidated.

• Leverage can provide you a massive loss in a very short time. As a fact if leverage rewards you to multiple times this can be reversed. In that case this is unbearable loss.

Conclusion

It is concluded that leverage has both positive and negative impacts but negative impacts are more disastrous. In a sense that if you don't have risk management you will loss all of your assets through liquidation. So that is why we before using leverage we should completely learn about the risk management and its consequences.

So friends that all was about that challenge and I hope that you will like it. Now it is a time to say goodbye to everyone and I want to invite my friends @yancar, @casv, and @steemdoctor1 to take a part in this amazing challenge of Steemit crypto academy.

---

Written by @abdullahw2

---

---

Thanks All ❤️

---