Leverage refers to trading using borrowed money. When using leveraged financial instruments, a trader borrows a multiple of their existing capital to buy an asset with.
Leverage on profitable trades can amplify returns considerably. For example, let’s presume that the current BTC price is $10,000. A 10x leveraged position with $1,000 starting capital would allow the trader to buy 1 BTC. If BTC price rose 10% to $11,000, the position would be in $1,000 of profit. Meanwhile, a non-leveraged $1,000 position would return just $100 of profit.
Leverage also increases potential losses. In the above example, if BTC price decreased by 10%, the non-leveraged position would lose $100, while the leveraged one would lose all $1,000 of the initial capital. It’s vital to understand these risks before using leveraged financial instruments.