When borrowed money is used to increase profit or losses in a significant or potential way by using a financial concept then the concept that is used behind it is called leverage in cryptocurrency.
If we imagine that we want to buy one of the most expensive thing which is suppose a home but we don't have enough money to do so so here we can use the concept of leverage for this we would borrow money from bank or from any person either is our friend or relative instead of waiting for having enough saving.
Example
If you want to invest in stock market and suppose you have one thousand dollars but you want to earn good rewards that's why you want to purchase more power so for this purpose you could use leverage and you can borrow 4000 dollars more from a broker and then total amount that you would be able to invest would be 5000 dollars.
If your investment goes in smooth way then it is expected it that you would make larger gains as compared to that if you would use $1000 so in this way it boost Your rewards and same thing can happen for losses because if investment value downs then you may face a significant loss for that you have invested initially.
Leverage should be used widely and precisely by keeping in mind that there could also be some of the risks that could involved behind leverage. If I summarize then leverage is one of the most interesting and thrilling phenomena but risk factors should also be kept in mind for prevention of any loss.
Leverage working I am going to explain below:
By the use of borrowed money you can increase your profits or losses by the implementation of leverage so you can control high amount of assets then you can with your own funds.
If I implement leverage imaginary example then we can see that suppose you want to buy something very precious but you don't have money to buy that thing in your hand for making such a big purchase so you wouldn't like to wait for a long time for saving that money and you would go for another option which is about borrow some money from bank and the money that you would borrow would be called as leverage.
Imagine that total money that you have are 1,000$ And you want to invest so that you may buy your favorite car and you want more money So when you would decide to borrow money from bank so that you may meet your needs then the money that you will borrow let's say is $3,000 would be called as leverage.
If investments goes well and value of your car goes up then you can make good profit with it and in this way your profits would multiply and on the other hand if your investment doesn't go well and value of your car goes down then it would lead you in loss.
Leverage is a powerful tool but there are also many of the risks associated with it so it could be very thrilling then investment goes well and when investment doesn't go as well then it could be very scary for you. Properly searching and understanding of market condition is very important before your investment so that your plans and dreams may come true.
Different reasons due to which leverage is used in cryptocurrencies I am describing below;
- We all know that cryptocurrencies are highly volatile in their nature so leverage is a great way to permit all traders to gain potential profits and traders take advantages of price fluctuations and make significant profits by using leverage.
For example you have 1,000 dollars and you wish that you may invest in Bitcoin so instead of investing just 1000 dollars you would like to invest more so that your buying power may increase and for this you would apply leverage by borrowing some of the money or some of the amount from Bank and in this way you would make profit if Bitcoin price goes up by 10% then definitely your investment worth would also increase and it would be a great chance for you to make significant profit.
- For opening a position cryptocurrency exchanges require minimum amount of funds so again leverage permit traders so that they may have an access to large position with their small amount of capital.It is very easy for traders to meet all these requirements by the use of leverage and still they also have funds for making other investments.
For example you say that you wish that you may have a trade of Ethereum and exchange requires minimum of $1000 for opening a position so suppose that you have just 5000 and you are thinking that now you are unable to participate so with 2x leverage you would be able to buy more 500 $ and then you would be able to open a position by the use of $1000 total. So in this way you can take advantage of trading opportunities even if you don't have full amount.
- Hedging can also be reduced by leverage and it is a strategy which have a great is used in reduction of risks of significant losses. Significant loses in one position can be offset by traders by the use of leverage.
For example if you are holding high amount of Bitcoin and you are thinking about significant price drop then instead you sell Bitcoin you would open a short position with leverage because selling Bitcoin could be very dangerous for you if price goes up suddenly so if price doesn't drop then profits that you can gain from short position would help to offset the losses in your Bitcoin holdings or assets.
If I would open a long position with 12000 USDT in steem and a 10x leverage then this happens with calculations;
First of all we have to suppose that price of steem is rising by 45% and we want to calculate significant profit.With 10x leverage My buying power should be 10 times then my initial investment which is I have already told that it is 12000 USDT. In this way my total buying power would be 120,000 USDT.
For the calculation of profit it is important to multiplying percentage increase by buying power So as in this scenario price of steem is rising by 45% So below I am calculating profit in this way.
Here is formulae
Profit = Percentage Increase * Buying Power
Profit = 0.45 * 120,000 USDT
Profit = 54,000 USDT
Above you can see that potential profit that I have gained is 54,000 USDT if steem price is increasing or rising by 45%.
Now if we suppose that price of steem is dropping by 15% then potential profit would be calculated in this way.
We would again use 10 times leverage and just like above my buying power would be 120,000 USDT. For the calculation of profit we have to multiply percentage decreased by my buying power So in this way and in this scenario when price of steem would be dropped by 15% then profit would be like this;
Here is formulae
Profit = Percentage Decrease * Buying Power
Profit = 0.15 * 120,000 USDT
Profit = 18,000 USDT
My potential perfect that I have gained after above calculation is 18000 USDT Which is a result of dropping in the price of steem by 15%.
My opinion
I don't have any specific personal investments at any specific cryptocurrency but I can generally tell you that leverage could be very powerful tool but just like other strategies there could be many risks related to it but it can also amplify potential profits and can be helpful in magnifying the losses if market is moving against your positions.
There is a great need to have thorough research before making any investment or before using leverage so that you may stay informed about market fluctuations and you must also consider a financial advisor if you think that it is a need to do this but still your own research matters a lot.
Different advantages and disadvantages of leverage I am going to explain below;
Advantages of Leverage:
With smaller initial investment leverage permits you so that you make control over larger positions and in this way you would have an opportunity to have great exposure to gain significant profits.
Leverage could be a great ways in magnification of your gaines that permits you to earn high returns at your investment when leverage is used in a correctful manner.
Diversification opportunities are also considered as one of the most important advantage of leverage because you can spread your investment across different markets which increase your portfolio diversification.
Disadvantages of Leverage:
- If I talk about disadvantage then leverage can amplify profits as well as it also amplifies losses so if market is moving against your position then you can minimize your losses by surpassing investment that you made initially.
When you use leverage then there are certain requirements for the maintenance of a certain margin in your account and if market is moving in unfavorable way then your account can be at a risk of falling and after that you would receive a margin call which would require you to deposit additional funds or to close your position.
Leverage trading could be very challenging because higher price fluctuations can lead you towards making impulsive dicisions which creates emotional stress and clouds your judgment in this way also.
Leverage should be used with caution for avoiding any risk s but it is also a very beneficial strategy so again I am saying that complete research before making any investment or before using this strategy is important by you who is going to using it.
@khursheedanwar
Leverage should be used very judiciously as it acts as a double-edged sword, taking traders up a notch, but when it turns against you, it can hurt you a lot. You can also lose your entire balance and this should be used especially with your caution in order to accumulate as much capital as possible and reduce the leverage that is available. They earn a lot of profit by using it, but it also goes against many people and I have seen these people wash their hands of their capital, which means they lose all their capital.
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@solaymann Thankyou so much for your support
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First of all I really appreciate your comment at my post and its seems that you read each and everything carefully in my post and after that you write such an extensive comment but really I agree with you that either it is very beneficial and profitable for all of us but if I talk about its risk then it should be done with question because in risks there could be a great loss that we have to be here if it would be done without research so I wish you success in this engagement challenge and soon I would be also entry to visit it
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Upvoted. Thank You for sending some of your rewards to @null. It will make Steem stronger.
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Thanks a lot @solaymann
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Greetings friend,
The leverage strategy encourages short-term trading strategies, as positions need to be monitored closely, thereby limiting our ability to take advantage of long-term market trends.
However, it's important to also consider long-term investment strategies by diversifying our portfolio with a mix of long-term investments and short-term leveraged trades. Thank you for sharing this wonderful knowledge with us.
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Thank you so much for visiting my post I am happy to see you here as well as I agree with you that encouragement of short term trading strategies could be done through leverage because it like you have extra profits which is one of the most important benefit and invented of this strategy as well as you have also talked about long term investment strategies that how we can be more focus on it and over all it was a nice comment by you
I have also visiting your entry and just like before it was a complete elaboration of each and everything so again I wish you good luck and success
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The pleasure is all mine, to have learned from your work too.
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Thanks 🙏👍
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My post is not reviewed still! kindly review my post
Special mentions to;
@kouba01
@pelon53
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Slam brother 😊
Yes bro your are right that leverage allow us to hold a higher position in the market or any business because our investment increase due to the addition of leverage's amount. But our investment may lose due to the market fluctuations. So that is why we should be careful about it. By the way your publication is very interesting and well. Success to you 🤗
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Thank you so much for visiting at my post and I am very happy to see your comment here as well as it seems that you have clear understanding of everything whatever I have talked about as well as leverage is something that permit traders especially to hold greater positions in market because due to leverage everyone is able to attain extra profits but as we all know that beverage is also used in cryptocurrency that's why they should be different questions that we should kept in our mind and due to price fluctuations and high volatility of cryptocurrency so over all it was a very extensive comment by you and I really appreciate it I also visiting your entry and that was also very informative I wish you good luck and success in this engagement challenge again and thanks a lot for wishing me success
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Kya bat ha bhai mujhe smjh nai aa rhi k is comment ka reply kya don main 😂. I think you are ruling over the whole Steemit crypto academy through your meaningful comments and high quality Posts. I'm very glad to see your keen attitude. Keep it up 💐
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Bhai aapka comment bahut hi dilchasp hai aur mujhe se padhakar bahut Khushi Hui aur yah vakai mein aapki taraf se mere liye ek bahut jyada encouraging aur appreciating comment hai aur Main Apni Puri koshish ke sath is challenge mein win karne ki Raksha participate karne ki koshish mein hun aapka meri post per comment karne ka bahut bahut shukriya
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You are always welcome brother 💓
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😊🥰
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Greetings!
A person can't understand this strategy of Leverage if he has not ever borrow fund or loan.
When I start research on this topic , it was very interesting for me that with a short amount of capital a user can get potential gains.
Your writings are commendable. A person can easily understand this topic. Thanks for sharing this Wonderful information. Wish you more success..
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Thank you so much dear friend for visiting my entry as well as I really appreciate your concepts that if there is a person who doesn't take any loan cannot understand this strategy but still it's very easy to understand and agree with you that the way in which I have been elaborated in very easy words that every person can get basics of this topic at least I wish you success in your entry too
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It's my great pleasure my dear brother to visit your post. And Indeed it was informative.
Thanks
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