Leverage in the crypto world is the use of borrowed funds to increase the potential profits (and losses) of trading crypto assets. By using leverage, a trader can open positions that are larger than the capital they have. For example, with 10x leverage, a trader can control a $10,000 position with only $1,000 of their own capital.
How Leverage Works
Margin: Traders deposit a certain amount of funds as collateral or “margin”. The exchange or trading platform will lend the remaining funds needed to open a larger position.
Position Leverage: If a trader has $1,000 and uses 10x leverage, they can open a position worth $10,000. The trading platform lends an additional $9,000 to reach the value of the position.
Liquidation: Since leverage increases risk, the exchange or trading platform sets a “liquidation price”. If the asset price reaches this point, the trader's position will be automatically closed to prevent further losses that go beyond the deposited margin.
Leverage Risks
Risk of Large Losses: Just as leverage can increase profits, it can also increase losses. If the price of an asset moves against a trader's position, losses will also be magnified. For example, with 10x leverage, a 10% price drop can wipe out the entire capital used as margin.
Liquidation: Trading platforms have liquidation mechanisms in place to protect lent funds. If the price of an asset reaches the liquidation point, the position will be closed automatically, which means traders may lose their entire margin.
Fees and Interest: Borrowing funds for leverage usually involves fees or interest. This can reduce potential profits and add to the burden if positions are held for long periods of time.
Benefits of Leverage
Greater Profit Potential: Traders can open positions that are larger than their own capital, which means the profit potential also increases.
Capital Efficiency: With leverage, traders can utilize their capital more efficiently, allowing them to retain more liquidity for other trading opportunities.
Diversification: Leverage allows traders to open multiple positions across different assets without requiring large amounts of capital for each.
Is there leverage on Indodax?
No, for now Indodax does not provide a leverage feature because Indodax only provides a spot market.
Conclusion
Leverage in crypto trading is a powerful tool that can increase potential profits, but it also comes with significant risks. It is important for traders to understand how leverage works, the risks involved, and have a good risk management strategy in place before using leverage in their trading. With proper understanding and management, leverage can be a useful tool in a crypto trading strategy.