What is leverage in crypto trading

Leverages refers to using borrowed capital to trade on cryptocurrencies or other financial assets. It means your buying or selling power so you can trade with more capital than what you currently have in your wallet, depending on the cryptocurrency exchange you trading on, you could borrow up to 100 times your account balance.

The amount of leverage is described as a ratio, such as 5x(1.5),10x(1:10), or 20x(1:20).These shows how many times your initial capital is multiplied.

 For example, imagine that I have $500 in my exchange account ( binance) but want to open a position worth $5,000 in bitcoin (BTC). With a 10x leverage, your $500 will have the same buying power as $5,000.

One can use leverages to trade different cryptocurrency derivatives. The common types of leveraged trading include margin trading, leveraged tokens, and futures contracts.

margin trading implies the amount of money that is required to open a position. The leverage there implies the multiple of exposure to account equity. The amount of money used to open a position depends on its margin rate requirements that is the requirements to open a position on a trading.

Futures contracts on the other hand are financial derivatives that the buyer or seller agrees  to purchase some underlying asset or sell that asset at a predetermined future price and date. Furthermore, futures contract allows investors to determine on the direction of a security, commodity, or financial instrument, either long or short, using leverage.

Example of a leveraged position 

Imagine I want to open a long position of $5,000 worth of BTC with 10x leverage. This means that you will use $500 as collateral. If the price of BTC goes up 20%, you will earn a net profit of $1,000 (minus fees that is the leverage fees), which is much higher than the $500 I would have made if I traded my  $500 capital without using leverage. 

Now, imagine that you want to open a $5,000 short position on BTC with 10x leverage. In this case, I will borrow BTC from someone else and sell it at the current market price. My collateral is $500, but since you are trading on 10x leverage, you are able to sell $5,000 worth of BTC.