High Leverage Doesn't Always Mean High Risk

Wisebitcoin 2021-04-29

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Simply put, leverage is when you use additional funds in order to trade a larger number of assets while using only a small amount of your own trading capital. The rest of the capital is borrowed from third parties in a kind of loan known as margin.

Typically, how it works for traders is that when they look to buy, say, $1,000 worth of an asset, if the position would be leveraged 3X then the trader would be buying $3,000 worth of the asset with only $1,000 of their own money. This means that if the market goes up by 10%, for example, the trader will earn 30% on the trade. Meanwhile, if the market goes down 10%, the trader would lose 30% instead. Traders do this under the expectation that in an upwards trend they would be able to repay the initial loan and pocket the rest of the maximized earnings on the money they borrowed.

Although this seems like a win-win scenario, new traders are often advised to avoid high leverage trading as it comes with more risk. To allow professional traders to benefit from trading with higher leverage, Wisebitcoin’s Insurance Fund helps their assets withstand the volatility of the cryptocurrency market on perpetual swaps. 


How Leverage Can Help

Leverage can be an efficient way to use trading capital. It allows traders to play larger positions without exposing the entirety of the initial capital. Minimizing the amount of trading capital to be used on a particular trade frees the rest for other trades.

For example, say a trader has $30,000 and decides to buy a thousand digital tokens for $30 each. With access to 3X leverage, the trader might be able to buy these thousand tokens using only $10,000 of the initial trading capital. In this case, the remaining $20,000 is freed to invest in other trades.

The additional advantage of leverage is that it can also potentially reduce the risk to the entire capital pool. Going back to the previous example, if the trader had invested all of $30,000 into one trade, the trader would be at risk of losing it all. Leverage removes that risk by using only a part of the total amount, $10,000, so even if the trader loses it is a smaller amount than the case where the entirety of the capital was used.

Now let’s see how leveraging functions in the cryptocurrency market.


Leverage in Cryptocurrency

What makes trading in a cryptocurrency market different is its higher volatility compared to traditional markets. Intraday digital traders can take advantage of its volatility by doing quick buy and sell to reap big profits, unlike long-term investors who hold onto assets for years.

Buying crypto on a margin from broker loans to use it in their trading account is a regular practice. Many seasoned traders who know how the game works are more than eager to take advantage of crypto’s volatility to reap significant benefits in a short period of time.

Traders can also use leverage at the time when the market is in periods of flat price action. The problem with the flat periods is that if it continues for a long time it can push traders out of their options while they wait for the market to fluctuate and new trends to emerge.

The potential benefits from the flat price period are small. Hence, leverage is a good strategy in these situations where traders can only gain from marginal increases in the cryptocurrency’s price.


The Need for Wisebitcoin’s Insurance Fund

Higher leverage is often associated with higher risks, especially when the market is very volatile. When dealing with fiat currency, investors have the advantage of insuring their stock to some extent to avoid complete losses, if any. For cryptocurrency markets, Wisebitcoin’s Insurance Fund comes in handy during especially volatile seasons.

This feature works by buying the trader some time a trade is set to result in a loss that is greater than the margin that was borrowed. It is “designed to prevent a position from being auto-deleveraged, meaning it won’t be closed out if it cannot be executed at the liquidation price in the market,” as previously explained by the Wisebitcoin team. 

The Insurance Fund applies to perpetual swaps made on the exchange. It is an additional way for traders to hedge against volatility in the cryptocurrency markets when they’re trading with leverage.

Trading with higher leverage not only helps you play across the trading floor with minimum capital but also exposes you to higher returns. Wisebitcoin puts together features like the Insurance Fund for perpetual swaps and 100X leverage on contract trading so that if you find an opportunity to leverage trade you have all the tools to go for it. 

To learn more, visit Wisebitcoin.