Leverage is an extremely useful tool in derivatives trading that allows a trader to increase the exposure they have to the market by borrowing money from the exchange.
It amplifies your gains and losses from the trade, allowing you to make more profit (or loss) from small price movements, either up or down.
Bitflex allows its traders to borrow up to 100 times your initial margin.
For example, suppose that a trader has $1000 in his account, but he wants to open a position for $10,000 in BTC. He can use 10x leverage to have the same buying power as $10,000 with his $1000, meaning his initial capital of $1000 will be multiplied by 10x.
The initial margin of $1000 that he has in his account will be used as collateral for his trade.
With a deposit of $1000 as collateral a trader can open positions worth:
3x Leverage: $3000
10x Leverage: $10,000
20x Leverage: $20,000
100x Leverage: $100,000
High leverage is accompanied by high risk at the same time as high yield. Please understand the risk before using it.
Profit/Loss Exposure from Leverage
Leverage is an extremely useful tool, but it must be used carefully.
It not only amplifies the exposure a trader can have on his position, but also increases the returns and risks that investors take.
A simplified example: suppose that a trader deposits $1000 to long $10,000 worth of Bitcoin using 10x leverage. (Final amount may differ depending on our formula calculations)
With a 5% increase in price:
- His initial position of $1000 in now worth $1500
- He has made a profit of $500 on his $1000 investment
- He made 50% return on investment with just a 5% price movement
With a 10% increase in price:
- His initial position of $1000 in now worth $2000
- He has made a profit of $1000 on his $1000 investment
- He made 100% return on investment with just a 10% price movement.
Now, let’s do a 5% decrease in price:
- His initial position of $1000 is now worth $500
- He is in a $500 loss on his $1000 investment
- He lost 50% of his investment with just a 5% price movement
With a 10% decrease in price:
- His initial position of $1000 is now worth $0
- He is a $1000 loss on his $1000 investment
- He got liquidated with just a 10% price movement
How Much Leverage Does Bitflex Offer?
Leverage depends on the cryptocurrency exchange you’re trading on. Bitflex allows its users to borrow up to 100 times(100x) their initial margin.
However, we strongly recommend you manage your risks accordingly as you have a higher of chances losing your initial margin with more leverage.