Leverage Trading In Cryptocurrency: It's Advantages To Traders

Source

Hello family,

It is your favourite blogger @mato445 and I am here to discuss a new and interesting topic with you all.

For experts in the cryptospace, the term leverage may not be a new term but to others it may be, and they may lack the proper understanding of what leverage in cryptocurrency means.

In this post, we shall be discussing extensively on leverage in cryptocurrency.

LEVERAGE IN CRYPTOCURRENCY

Leverage in cryptocurrency can be explained to be the use of borrowed funds as capital for an investment inorder to increase the profit potential on that investment.

It is also known to be the act of borrowing funds from a cryptocurrency exchange inorder to increase your position in a trade.

Leverage gives traders the opportunity to use a small amount of capital to control a larger position size, and this has the ability to amplify both losses and profits.

Leverage is commonly expressed through the ratio 10:1 or 20:1, showing an indication of how much larger the trading position is when compared to the size of the trader's account.

For example, making use of a leverage 1:10, this means that a trader can make use of a $200 capital to control a $2000 trading position.

Leverage in cryptocurrency is always used for due to its potential for larger investment returns.

It is very important for us to note that although the market magnifies profit, it also magnifies losses when the market moves against the trader.

ADVANTAGES OF LEVERAGE IN CRYPTOCURRENCY

Source

There are several advantages of leverage in cryptocurrency and we shall examine some of them below.

• ENHANCED PROFIT POTENTIAL:

Through the help of leverage, traders are given the opportunity to amplify their profit potential by being in control of a larger position than their capital permit.

Like the example I gave earlier, if a trader makes use of a leverage size of 1:10, he will be able to manage a position of $2000 with a account capital of $200.

Also, if the market moves in the favourable direction, the profit made will be calculated using the amplified position.

However, noting that the the same thing would happen if the market goes against the trader is very important.

When the market goes against the trader, the loss will be calculated from the amplified position size.

• CAPITAL EFFICIENCY AND PORTFOLIO DIVERSIFICATION:

Leverage gives traders the opportunity to make more efficient use of their trading capital.

Traders are also given the opportunity to allocate their funds across a broader range of asset, rather than tie up a huge capital to enter a position.

This supports portfolio diversification and gives traders the opportunity to spread risks and be a participant of multiple market trading at the same time.

Due to the volatile nature of the cryptomarket, diversification becomes very important.

• SHORT SELLING OPPORTUNITIES:

Short selling is being facilitated by leverage, this is a trading strategy where traders make profit from the fall of a market price.

Short selling in traditional market can be complex and not easily accessible but with the help of leverage, short selling becomes more easily accessible.

Traders can now take advantage of upward band downward price movement to make profit.

• RISK MANAGEMENT AND FLEXIBILITY:

It is no news to us that as leverage increases the potential for making profit in the market, it also amplifies losses if the market goes in the wrong direction.

However, leverage can be used by traders as a part of a comprehensive risk management strategy.

Stop loss can be employed alongside other risk management techniques to limit market losses and still enjoy from the amplified market exposure.

Also, leverage gives traders the opportunity to swiftly adjust their position in response to development in the market.

• ACCESS TO LARGER MARKET POSITION:

With leverage in trading, traders are given access to a more liquid and a larger market position that would be naturally allowed by their capital.

In cryptocurrency market, where there is variation in liquidity, leverage help to ensure that traders can exit and also enter big Positions without affecting market price.

This improved market access is very important for capitalizing on short term trading chances.

CONCLUSION

Source

It is very important to have a cautious approach to leverage in the cryptospace, while understanding the various risks associated with it.

The volatility of the cryptocurrency market associated with the amplified market positions can result in potential losses if the market goes against you.

Traders should cautiously apply risk management techniques and also be well informed on market conditions, so as to make profit from market movement.