Leverage is a loan offered by a broker on an exchange during margin trading to increase the availability of funds in trades. Investors use leverage to increase their purchasing power in the market.
Traders can use leverage when placing short or long positions. With leverage, traders can increase their profits, but at the same time, they also increase their losses.
For example, let’s say you have a $100 Bitcoin position. If a trader increases the position by leverage of 10x — often written as a ratio of 1:10 — the $100 BTC position would become $1,000.
The amount the trader initially has is called margin. This amount is used as collateral if the cryptocurrency or asset in question falls. The amount of leverage that an investor can access will depend on the trading platform they choose, as well as the digital asset they are wishing to gain exposure to.