Steemit Crypto Academy Contest / S13W6 - Leverage in cryptocurrencies.

Hello everyone!

Week 6 has started and there is another amazing contest organised by this community about Leverage and It will be interesting to discuss about this topic.

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

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In Cryptocurrency Trading, Leverage means using borrowed funds in trading. Leverage allows us to borrow funds and to make our capital big. If our capital is small and We use leverage, then we can trade using large capital.

Leverage increases our trading position and We can make good profits by taking leverage as It helps us to trade by making small capital to large capital.

With leverage trading, It increases the chances of making good profits but with this, We can also liquidate our position if the trade goes against our direction.

In Binance, there is upto 125x leverage in Bitcoin and upto 100x leverage in Ethereum and many Cryptocurrencies.

^{There is upto 125x leverage in Bitcoin on Binance Exchange}

In simple words, Leverage is just an advantage in a situation like It is a situation where we can borrow a particular amount of capital and with this, We can turn our small capital into large capital.

For example, If We have only 50$ as your capital and It is small capital as we know but If we use 20x leverage in this and It will make our 50$ capital into 1000$ capital.

It means We can trade using 1000$ capital and If the price of that currency rises just 5%, then We will make 50$ profit and It is huge according to our initial capital. But Remember one thing, If we use high leverage, then the chance of liquidation will also be high.

Explain how leverage works.

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Now, Let's talk about how this leverage works in trading. There are many exchanges like Binance, Mexc, Kucoin and many more in which We can use leverage in future trading.

We always use high leverage in order to make big profits from our small capital but We should always remember that with high leverage, chances of liquidation also becomes high.

Let's take a simple example to explain about working of leverage in Cryptocurrency Trading. Let's assume I had 100$ as my capital and I know It's a small capital and I want to make big profits using this small capital.

Let's assume I use 15x leverage in BTCUSDT using 100$ as initial capital. So, After taking 20x leverage, My capital will be 100 × 20 = 2000$. In this way, I have made my small capital to a big capital and I have taken a long position in BTC.

Now, If Price of BTCUSDT rises only 5%, then I would make 100$ profit in my trade and You can see that I will double my initial capital with only 5% movement in the price of cryptocurrency and that's only possible because of leverage.

But as we know that there is also risk if we use high leverage and If the Price of BTCUSDT goes down only 5%, then It may result in liquidation and I would have lost all my capital.

^{Example of Leverage Trading}

From the above image, You can see that If I open a long position in BTCUSDT at price 37480$ using 20x leverage, then It will liquidate my position if BTC price goes down to 35754$ which is just 5% of the entry price.

So, This was all about how leverage works.

Why is leverage used in cryptocurrencies?

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• Leverage is used in cryptocurrencies and other markets to provide trading opportunities to even small traders who have small capital. It allows small traders to make their capital big by using leverage and It helps them to generate good profits from small capital if their trade goes in their desired direction.

• Leverage allows traders to benefit from the small price movements of the cryptocurrencies. Like as we all know that In Sideways Market, there is not so huge movement in the price of Cryptocurrencies and Traders cannot make big profits in Spot trading. That's why, Leverage is used. By using leverage, Traders can make big profits with even small change in price of Cryptocurrencies.

• As we all know that Sometimes in Strong Uptrend or Downtrend, Traders identify some cryptocurrencies which can show huge movement in price. In this case, Traders use leverage to take benefit of this situation and Traders can make huge profits by using leverage in trading.

• Leverage can be very beneficial for making profits if our trade goes in desired direction and used according to Risk Management. Like, If the price of the asset moves little in our desired direction then, We can move our stop loss to our entry point and We can make big profits using this strategy.

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.

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Let's assume I have 12,000 USDT in steem and I can use leverage of 10x in trading and let's discuss the outcomes we will make if price of Steem goes up or down.

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I have 12,000 USDT as my initial capital and after using 10x leverage in my trade, My initial capital of 12,000 USDT will turn into 1,20,000 USDT which is a huge capital.

Now, I open a long position in STEEMUSDT at price 0.25$. If the price of Steem rises by 45%, then It is a good movement in the price of the asset and let's calculate the profit in our trade.

Our Capital is 1,20,000$ after using leverage and If price of steem rises by 45%, then Profit will be 45% of 1,20,000 = 54000$.

Our profit will be = 54000-12000 = 42000$

After deducting all the trading fees and interest rate of the trading, I would have made a decent profit. And If I don't use leverage in this trade, then I would have only made 4200$ profit. That's where Leverage works. It help traders to make a huge profit.

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I open a long position in STEEMUSDT at price 0.25$ using 10x leverage. If the price of Steem drops by 15%, then It will go against our direction and let's calculate the loss in this trade.

Our Capital is 1,20,000$ after using leverage and If price of steem drops by 15%, then Loss will be 15% of 1,20,000 = 18000$.

It means 12000-18000 = -6000$.

So after just 15% drop in the price of Asset, We have liquidated our position. That's why, We should do proper technical analysis before opening a position using high leverage.

In my opinion, Leverage is a very beneficial tool for a trader as It helps a trader in turning small capital into big capital and We can make profit from small price movements also which is really a plus point of using Leverage.

But If the trade goes against our direction, then We can incur huge loss or even We may liquidate our position. So, We should do proper technical analysis and in multi time frames to avoid situations like liquidation.

Mention the advantages and disadvantages of leverage.

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Now, I will discuss some of the advantages of Leverage in trading.

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Advantages

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• Access to Large Capital - Traders can turn their small capital to large capital by using high leverage in their position as a trader can turn their capital to 10 times by using 10x leverage.

• Higher Returns- As A trader can open a position using large capital because of leverage, then the chances of profit also increases like trader can generate profits in even small price movements.

• Big Exposure- Because of Leverage, Trader can identify many entries in the market and even if they have small capital, they can open many positions by using high leverage in small small amount if they are able to identify good opportunities in the market.

• Allows to make profit in Sideways Market - In Spot trading, We don't usually make profits in Sideways Market because there is little movement in price of assets but by using leverage, We can even generate good profits in Sideways Market.

• Various Options Available in Leverage- There are some strong cryptocurrencies like Bitcoin, Ethereum, Litecoin which allows us to use upto 100x leverage. In case, Trader is able to identify perfect opportunity in the market in these assets, then they can open position using high leverage and can generate huge profits.

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Disadvantages

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• High Risks Involved- If We use high leverage in trading and If the market goes against our direction, then we can incur huge losses in small movement of price against our direction.

• Liquidation- There are also chances of liquidation of our position if the trade goes against our direction and It can blow out all your fund in one wrong move.

• Limited Risk Management- In Leverage trading, It is very important to manage risks in trading. Many traders don't manage their risks and It leads to losses. In Leverage trading, Every trader must practice risk management.

• Over Trading- As Traders can open positions by using small capital and In order to make profits in small price movements, they open positions without any analysis and It can incur losses. For recovering their last loss, they start doing over trading using high leverage which can blow their capital.

Conclusion

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Leverage can be a very powerful tool for a trader if it is used according to market opportunities and with proper analysis. Traders can generate good profits with small capital but If Market goes against our direction, then due to high leverage, We can incur huge loss in even small price movements.

I have discussed about Leverage trading in this post, It's advantages and Disadvantages and how it works in trading. It was really an amazing contest organised by this community and I am thankful to participate in this contest.

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I would like to invite @sahar78, @malimusman1 and @starrchris to participate in this contest.

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Thank You.