Leverage is the ability to use borrowed capital as a source of funding to invest or trade in open markets. It’s an investment tool by using borrowed money to increase the potential of return on investment.
Note: Leverage can also refer to the amount of debt used to finance assets. When a company, property, or investment is referred to as “highly leveraged,” it means that the item has more debt than equity.
Using leverage when trading Bitcoin gives traders an option to trade larger amounts even with small capital. In this context, the Bitcoin trading sector functions much like its experienced counterpart, the forex trading sector that also offers similar options to its traders.
For instance, a 50x leverage represents the ability of the trader to place trades 50 times more than their actual capital. If you have $1 and borrow $50 leverage to trade Bitcoins, when the price action moves in your favor by 1%, it will result in a profit of $1. If you have a larger amount to trade, let’s say $50,000 against your original capital of $1,000, that same price action of 1% increase in Bitcoin will result in $5,000 in return.
On the other hand, if the price action moves against your favor, the loss will amount to as much as the profit. When you are leveraged, there are more risks involved. In as much as there is a lot of potential for turning a profit in a risky trading method, there is also as much potential for losses.