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What Is Trading Leverage in Crypto? How To Get Money Quickly

Leverage in the world of cryptocurrencies refers to the use of borrowed capital or margin, to increase the profit potential of an investment.

Leveraged trading involves borrowing money to increase the number of coins a trader can buy, with the expectation that the profit earned on the trade will exceed the cost of the borrowed capital.

How does leverage trading work in crypto?

For example imagine a trader who expects the value of one of the assets to increase. Without leverage, a trader with US$ 1,000 can buy 10 units of crypto for US$ 100.

If the price increases by 10 percent the value of the trader's holding will be US$ 1,100, for a profit of US$ 100.

However, if traders used 2:1 leverage, they could buy the same 20 crypto coins for US$2,000, with US$1,000 being their own money and US$1,000 borrowed.

If the price increases by 10 percent, the value of the trader's holdings will be US$ 2,200. After repaying the US$ 1,000 borrowed capital, the trader will have US$ 1,200, with a profit of US$ 200.

Keep in mind that leverage is a double-edged sword. That is, it can increase profits, but it can also exacerbate losses.

For example, if a trader makes the wrong prediction and the price of the cryptocurrency drops 10 percent, they will lose US$ 200 instead of only US$ 100.

What Is Trading Leverage in Crypto? How To Get Money Quickly

Crypto exchanges usually offer different levels of leverage, such as 2x, 5x, 10x, or even higher.

Some exchanges, such as BitMEX and Binance, offer up to 100x leverage for certain cryptocurrencies. The choice of leverage level depends on the trader's risk tolerance, market expectations and their trading strategy.

When trading with leverage, a trader needs to provide collateral to the exchange, which serves as collateral for borrowed capital. This guarantee is usually a percentage of the total trade value and is referred to as margin.

If the trade goes against the trader, the exchange will place a margin call, which requests additional funds to cover potential losses.

The specific point at which a margin call is executed is determined by the maintenance margin. This is the minimum collateral amount that must be maintained in the account for trades to remain open.

If the account balance falls below the maintenance margin, the exchange will automatically close the trade to prevent further losses, a process known as liquidation.

Despite the inherent risks, leverage trading remains popular in the crypto market for several reasons.

First, trading leverage provides high profit potential with relatively small initial capital. This is especially interesting in crypto markets which are known for their volatility and large price movements.

Second, leveraged trading can be used as a hedging mechanism, allowing traders to open positions that cover potential losses in other investments.

However, to successfully deal with the complexities and risks of leverage trading requires a deep understanding of the cryptocurrency market and strong risk management skills.

Traders must implement effective strategies, such as setting appropriate stop-loss orders, regularly monitoring market conditions, and being prepared to adapt their approach based on market changes.

Regulation is another important aspect to consider in crypto leverage trading. The crypto market remains relatively unregulated compared to traditional financial markets, which can expose traders to additional risks, including insolvency and exchange fraud.

Despite this, several countries have started to introduce regulations to protect traders and ensure market integrity.

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