Steemit Crypto Academy Contest / S13W6 - Leverage in cryptocurrencies.

edited by iMarkup

Introduction

The last week of the 13th session is here, I'm very happy to be part of this session and complement of the hour of the day to you all in any part of the world. This week topic is all about leverage in Cryptocurrencies and I would like us to look into it. However, leverage is just like borrowing capital to do a business as this will allow you to buy more goods. If you can understand this, then you have it already on your palm.

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

In a layman understanding, leverage means using what you don't own to achieve a desired goal. This will help you to reach your desired target on time. However, it's just like getting money from your friend to add to the little one you have in order for you to be able to accommodate more goods in your favour. This would help me to expand my capacity on the quantity I'm buying.

edited by iMarkup

Leverage when related to Cryptocurrencies helps one to grow his little account without much capital and it's good for small account holders because it serve as a boaster for those with little capital thereby making that little account to become big overtime.

Note, it also involved high risk just like boasting the gain, you may also loss all your capital since the market is highly volatile. However, leverage is the means of trading or investing in Cryptorcurrencies through an exchange.

Let us look at this scenario where you have $10 but you want to buy a position higher than your $10 which your capital can't afford to buy, leverage will allow you to borrow to gain what you desired. However, you will be privilege to borrow $90 to buy a $100 position to enable you trade the market.

You should know that it involves higher risk when using leverage because it can result to a loss. If the trade goes to my favour by 10%, i would have made $10 profits instead of making $1 of my $10 capital. This will make you to gain advantage of making $9 more in returns.

Explain how leverage works.

Leverage in Cryptocurrency is represented by percentage(%), whereby the higher the % the higher the gain as well as the risk.

If for instance I want to buy BTC but my capital is limited to $100, but with the help of leverage I can borrow 10x. This means 10x more of my capital. I can now have $1,000 in addition of my $100 to be $1,100 to trade Bitcoin.

This maths can be seen below:
$100 + $(10×100)=$1,000
$100+$1,000=1,100

With the help of leverage, I stand the chance of having $1,100 to trade BTC, so if there is increase in the price of BTC, I make more profit from the market than just investing with my mere $100.

If for instance, the price of Bitcoin increase by 10%, I stand the chance of earning $110.

I would like us to illustrate further for more clarity:

How to calculate the profit

Profit =∆% × Inv.
Interest = 10÷100 = 0.1
Investment = $1,100
Profit = 0.1 × $1,100 = $110

This shows that I made back 100% return on investment of $100 after deducting the loan interest.

Loan Interest = % of leverage × Principal

Loan Int. = 10÷100 of $100 = $10.

Net Profit = $110 - $10 = $100
This is a 100% of my initial capital of $100. This is only possible because of the assistance of the leverage I'm using. Note, without the help of leverage, I should had earned $10 as profit.

Profit = ∆% × Investment
Profit = 10% × $100 = (10÷100) × 100
= 0.1× $100 =$10

On that note, we should also have it in mind that leverage can equally bring significant losses just as the way we made profit. For instance, if the market price of Bitcoin decrease by 10%, I should incurred $110, this means I loss my initial investment plus a debt of $10. This debt of $10 incurred is as a result of loosing 110% of my investment.

Let's check this out:

110% × $100 = (110÷100)× $100
= 1.1 × $100 = $110

But you noticed i only had $100, however, $100 - $110 = -$10 debt. This represent loan interest.

Now, my account would had just liquidated $10 without leverage. Lets look toward that below:

Loss = ∆% × Investment
Loss = 10% × $100 = (10÷100) ×$100
Loss = 0.1 × $100 = $10

This is the secret of leverage in the Cryptocurrency market and how its been apply.

Why is leverage used in cryptocurrencies?

Leverage is used by traders to help facilitate their trade to bigger profit, especially for those with little capital. Leverage can help you grow your capital to a standard account. We are looking at from $10 to $500 applying leverage.

With the help of leverage, you can buy more position in the market as compared to your little capital. You can take advantage of a small movement in the market using 1 minute timeframe while you increase your leverage to make huge amount in a short time in the Crypto market. It also allows a trader to invest in different assets in the market. I can say that leverage is just to help build your account but also have high risk.

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.

Let us go straight to see what we stand to gain/ loss by having $12,000 in Steem, with a leverage of 10x. Using a potential rise of 45% and a drop of 15%. The favour of opening a long position in Steem can be seen below:*

First and famous, we have $12000 x 10 = $120,000
Steem = $12000
Leverage = 10x.

45% Rise

If there is increse of Steem price by 45%, the following gain will come forth.

0.45 x $120,000 USDT = 54,000 USDT.

Calculation of Profit/Loss = ∆℅ x Investment

Profit at 45%, we will have the following:

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

This would had been the profit made in opening a long position.

15% Drop in Price

Loss = 15/100 × 120,000 USDT
0.15 × 120,000 USDT
LOSS = 18,000 USDT
If the price of Steem drops by 15%, then i would have a draw down of 18,000 USDT as loss.

Opinion:
I would say that before you involved in using leverage, you should know the risk involved and also risk only what you can afford to lose because the market is highly volatile. Note, leverage can help build your account faster from small to large but can also wipe up your entire account in a minute depending the movement of the market.

Mention the advantages and disadvantages of leverage.

Advantages of Leverage

1. Leverage helps those with small account to build to a greater amount.

2. It gives room for traders to buy into a position which initially couldn't because of their account size.

3. Trading of larger volume is made possible

4. It give room for retail traders to be able to buy larger positions of assets with small amount of money.

5. It assist traders with the purchasing power in the Cyprocurrencies market.

Disadvantages of Leverage

1. The risk of using leverage is too high and can liquidate your account once. This always takes place when the market is not in your favour.

2. It can lead to great losses that is unbearable.

3. The open positions can automatically closed when the amount in the account falls below the expected margin. This happens when the trade goes against you.

4. There are higher risk in using leverage when trading the market.

Conclusion

Leverage trading can make one rich as well as poor. This is because it involves high ridk.

I would encourage both old and new traders to make sure they calculate the risk they are willing to take before opening a position in the market.

This is because the market does not know anyone. Therefore, only invest what you can afford to lose.

We can also make a lot of money using leverage while trading. However, the adequate skills and knowledge should be acquired before making use of leverage when trading the financial market.

Thank you very much and I trust you found value?