What Is Leverage?

Leverage is a loan offered by a broker on an exchange during margin trading to increase the availability of funds in trades.

The term leverage relates to the extent by which a trader’s position and hence profitability has risen through the loan. 

It is also known as the amount of debt borrowed by a firm to fund assets. 

Leverage is used by investors to increase their purchasing power in the market. 

For instance, take a $100 Bitcoin position. Assuming a trader’s position was increased by a leverage of 50x — commonly expressed as a ratio of 1:50 — this would mean the $100 BTC position is now $5,000. 

The amount the trader initially has is called margin. This amount is used as a collateral if the cryptocurrency or asset in question falls. 

Margin trading is exceptionally risky. As well as amplifying profits, it can also exacerbate gains. This strategy can be applied to both long and short positions.

Shorting is an investment technique a trader may adopt if prices are expected to fall. Meanwhile, going long is a strategy that can be implemented when the price of a cryptocurrency is expected to appreciate. 

The amount of leverage that an investor can access will depend on the trading platform they choose, as well as the digital asset they are wishing to gain exposure to. 

Some countries have sought to clamp down on margin trading amid fears that it could cause extensive losses among less experienced investors.