What Is Leverage in Cryptocurrency
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March 29th, 2022

Underfunded companies may choose to use borrowed funds for production in order to boost their returns. However, it also increases the risk that if the business does not perform as planned, the company will end up with more debt than assets.

To put it simply, "leverage is taking debt (borrowing money) for your own business". Leverage can be achieved through borrowing or derivatives.

Likewise, in the stock market, leverage may provide a practical option when you don't have enough money to buy $50,000 worth of equity.

When to use leverage?

Suppose we want to buy stock A with a minimum lot size of $500, but we only have $100. what should we do?

We can use leverage.

Example:

5x leverage: $100 x 5 = $500. So we can buy $500 worth of stock with $100.

10x leverage: $100 x 10 = $1,000. So we can buy $1000 worth of stock with $100.

As you might imagine, you can buy the same stock for less money using higher leverage.

Transaction fees and interest paid/charged are determined by the notional amount traded in the derivatives contract. Since we are trading $1,000 anyway, we pay the same fee and interest. Why don't we use higher leverage and pay less margin? If the price of stock A rises as you expected, congratulations! You made a great deal! However, if prices fall otherwise, high leverage is accompanied by accelerated liquidations. Liquidation means that all funds in your account will be lost.

If you trade without leverage, even if the stock price plummets from $100 to $1, you can still get your $1 back by selling the stock or holding on.

In leveraged trading, when your position margin drops to the maintenance margin threshold, you will receive a margin call or be liquidated. To avoid liquidation, you can use lower leverage. As we can see from the second example, the lower the leverage, the higher the margin required and the greater the buffer for liquidation.

References:

What exactly is margin trading?

Margin trading allows you to make spot buying and selling of cryptocurrencies on the BTCC exchange using funds that may exceed your account balance. E.g:

Let's say you fund your account with $5,000. Using BTCC's margin extension, you can use this account to buy and sell $500,000 worth of BTC/USD on the BTC/USD order book.

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