Crypto leverages are financial instruments that allow traders to make a trade by borrowing money. Leverages allow for returns and losses in terms of multiples of the collateral. However, they carry a lot of risks associated with them.
The Crypto industry is booming at a rapid pace. With this rapid boom, the number of investors and traders in the industry have also risen exponentially. Not just that, the number of financial instruments to facilitate innovative ways of making money have also populated the crypto industry. If you are one such trader or investor, you should know about crypto derivatives that come in the form of futures, options, perpetual and swaps. In addition to that, there is another type of financial instrument called crypto leverage that you should know about. Let’s dive into it to expand on the mystery.
What are Crypto leverages?
Crypto leverages are trading instruments. You can use leverage by borrowing money against some collateral and then trading with the borrowed money. This allows traders to take large positions in the market without actually having the funds to substantiate it. Essentially, leverages allow you to make trades that are larger than your purchasing power. Primarily due to leverage and the collateral against which you borrow money. Due to a leveraged position, they carry a lot of risk of losses. At the same time, due to a leveraged position they also allow for avenues of larger profits. Leverages are generally used for speculative purposes as they provide greater flexibility. Moreover, they are used to hedge the risks associated with crypto volatility.
An example of how a crypto leverage trade would play out in the real world is simple. Let’s say you have x3 leverage on $100. That means that you can buy $300 worth of crypto with $100. If the price of the asset goes up by x1 you earn x3 is a simple way to explain the leverage trades. They are not dependent on the price of the underlying asset.
Fundamentals behind Crypto leverages
It’s interesting to see how crypto leverages work. Essentially, you take borrow some money against some collateral to make an investment in an asset. Two fundamental concepts that work behind Crypto leverages are margins and liquidations. Margin is essentially the amount of money you borrow from your broker to invest in an asset. This is why the popular phrase, “trading on margin” is used. Liquidation is a process that takes place when the trader’s position makes more losses than the margin they are trading on. While liquidation, the open positions of the trader are closed.
Now that we know the fundamentals of crypto leverages you can start using them. But before that always remember to do your own research