How to Use a Leverage in Contract Trading?
Leverage, as the name suggests, can magnify the result of an investment at a fixed rate, whether being a gain or a loss. In the cryptocurrency realm, leverage is a tool that has been widely applied in both leverage trading and contract transactions, among them, most investors would select the margin mechanism in contract trading and use a 10x to 100x leverage to achieve the goal of magnified profits.
Let’s take a look at the details about leverage.
- What can leverage do?
As an investment strategy, leverage trading can bring mutual benefits to both the market and investors.
Benefits to Market:
1) “Strongly Accelerate” market demands for assets;
2) Brings more liquidity to the market when investors use the capital for multiple transactions.
Benefits to Investors:
1) Effective use of capital
2) Release capital
3) Use leveraged investments to earn multiple returns
4) Arbitrage and hedging
And this is why “leverage” is popular with professional investors.
2. 1x vs. 10x Leverage
Currently, the leverage on the market ranges from the lowest 1x to the highest 100x. Let’s take an example to see the difference between 1x and 100x leverage.
When the BTC price is $5,000, an investor uses 1 BTC as the margin and selects 1x leverage to trade a contract worth 1 BTC. When BTC rises to $5,050, his profit will be $50, equivalent to 0.0099 BTC.
In contrast, if the investor uses 1 BTC as the margin and selects 10x leverage, the contract value will be 10 BTC. When BTC rises by 1% from $5,000 to $5,050, his profit will be $500, equivalent to 0.099 BTC.
Compared to 1x leverage, the actual earning by using the 10x leverage is 9 times the 1x leverage.
It can be seen that with the margin system, investors can use small amounts of capital costs to achieve greater returns.
3. 100x Leverage
Let’s take a look at the 100x leverage in the market.
If Bitcoin worth 8,000 USDT, and the value of a single contract 1 USDT.
If to open short 80 contracts with 100 leverage, ignoring the fee, 80 USDT is required as the margin. That said, investors can complete an 8,000 USDT transaction with the cost of only 80 USDT.
When the BTC price rises from 8,000 USDT to 8,050 USDT, the comparison between 1x and 100x leverage is as follows:
This is the 100x leverage under the margin system.
To leverage large funds with small funds, rich leverage is essential. Concerning this issue, many investors will choose an authoritative exchange in the industry, such as 58COIN.
58COIN pioneered the 100x perpetual contract in Asia, exceeding 80% of the old and new exchanges in the industry. At present, there are eight leverages available at 58COIN, 2x, 3x, 5x, 10x, 20x, 33x, 50x, and 100x, providing investors with a variety of leverage options.
4. Co-existence of Benefits and Risks
Notably, the use of leverage is a double-edged sword, lying in the fact that the profit or the loss it generates can be substantial.
When calculating the profit and loss after using leverage, instead of applying the used margin, the result is based on the enlarged amount of funds.
Suppose that the Bitcoin price is $8,000, an investor believes in the bullish trend and pays 1%, $80 as the margin to open long.
If the BTC price indeed rises and soars to $9,000, then the investor makes a net profit of $1,000, equivalent to 0.11BTC, with a profit rate of 1250%.
However, if the BTC price falls and drops to $7,000, then the net loss of the investor is $1,000, equivalent to 0.14BTC, and the yield becomes -1250%.
Assets borrowed via leverage can be applied to multiple financial tools, bringing potential returns to investors. Also, professionals attach great importance to leverage, which allows them to trade a large number of positions without having to invest all their capital in spot transactions with a certain risk.