The rise of cryptocurrencies has made many people start trading in the blockchain world. There are those who use various trading methods, one of which is leverage. Many say that trading using leverage can make you get huge profits in the crypto currency trading process. However, is this really the case?
So, for those of you who are new to the term leverage, this article will explain a little to you about leverage in the crypto world, how it works, and its advantages and disadvantages.
What is Leverage?
In simple terms, leverage can be interpreted as a loan or credit used by an investor when trading. So, the loans that investors get from lenders will be used in trading.
Usually, this strategy is carried out by investors to get profits from the minimum possible capital. On the other hand, investors also do not have sufficient capital to trade with the nominal they want.
However, the use of leverage in the world of trading, especially in the world of cryptocurrencies cannot be arbitrary. The reason is, a trader can get very large profits at one time. On the other hand, a trader can also suffer multiple losses by using leverage.
Therefore, it is very important for traders not to be too greedy and use huge leverage in the trading process. As much as possible, determine proportional leverage according to ability and the right conditions.
How Does Leverage Work?
In the world of cryptocurrencies, leverage will allow traders or investors to get maximum exposure from the small capital they have. The capital limit determined by the investor is referred to as the margin.
Usually, there are several types of leverage levels offered by various cryptocurrency exchanges in the world, ranging from 10x, 20x, 50x, up to 100x. Each level certainly has different risks according to the amount.
Then, how does leverage actually work in the world of crypto currency trading?
For example, you are a trader who only has Rp. 5 million in capital to carry out the trading process. With this capital, you want to buy ETH tokens which have a price of IDR 2.5 million per token.
If you don’t use leverage, practically you can only buy 2 ETH tokens. However, if you use, for example, 10x leverage, you can buy 20 ETH tokens with a capital of IDR 5 million.
In this case, the IDR 5 million capital is the margin limit that you specify for trading. By activating 10x leverage, your capital will change to 10 times that, which is IDR 50 million. That means you get a loan of IDR 45 million.
With a capital that has changed to IDR 50 million, you can get 10 times more ETH tokens compared to if you don’t activate leverage in your trading process.
However, the greater the capital issued, of course, the greater the risk generated. Continuing with the previous example, you might make a big profit when the ETH price goes up to IDR 3 million per token.
That means the value of ETH you have is IDR 60 million. Indirectly, you have received a profit of IDR 10 million or twice the initial capital that you deposited before.
It will be different if the ETH price drops to IDR 2 million per token. Not only does the value of your ETH decrease, but also all your initial capital will be forfeited and used up because the loss you suffer is IDR 500,000 per token multiplied by 10x leverage.
What you need to remember is that the capital that you have released to activate leverage cannot be withdrawn again. Your capital will later become collateral for lenders who have provided loans for you while trading.
Advantages and Disadvantages of Using Leverage
As written in the title, leverage is like a double-edged sword that can cause huge profits and losses to its users.
As written in the title, leverage is like a double-edged sword that can cause huge profits and losses to its users.
- Multiple Profits
One of the functions of leverage is to make investors able to get big profits with little capital. When you manage to calculate when to use leverage, you can make a lot of profit.
In fact, the greater the leverage you use, the greater the profit you might get in the crypto currency trading process.
However, of course you have to consider it as best you can and use leverage when market conditions are on your side. Usually, traders use leverage to get this advantage for short trades.
- Investment Strategy Variations
Apart from getting big profits, the use of leverage can also be used as a strategy variation by traders. Perhaps, some of the funds that traders use on a particular exchange are used specifically for using leverage.
On the other hand, the only account on another exchange is used for the long term by holding and trading without leverage. You might be able to do variations of this strategy to make a profit while keeping your portfolio breathing.
- Multiple Losses too
In addition to advantages, leverage certainly provides losses that can be said to be no joke. If you miscalculate, instead of the profit you get, you will reap the multiplied loss.
The greater the leverage you use, the greater the loss you will get if the price of the cryptocurrency you are targeting falls at one time.
Therefore, you must be able to take moments when you have to use leverage in your trading activities.
- Huge Psychological Burden
The huge volatility of cryptocurrencies certainly makes us worried and happy at the same time. The reason is, if the price of crypto currency rises very high, you can get a very big profit.
However, when prices drop drastically, the losses you reap can also be dire. This sometimes creates a huge psychological burden that you feel when using leverage. Especially if the capital at stake is very large.
That was a brief explanation of leverage and what leverage is. Hopefully it can add to your insight in carrying out the crypto trading process. Keep trying and good luck.
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Author: Muhammad Zaki Fajrul Haq
Follow me at @mzfajrulhaq (Instagram) or @ZakiFajrul (Twitter).