How to DeFi

Leverage

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trading

What

Broadly speaking, leverage in finance refers to using borrowed funds to purchase something, with the expectation that the profits on the purchase exceed the borrowing costs. Leverage can come in various forms: financial derivatives like futures and options, mortgages for private persons. There are numerous platforms that give people access to leverage, both centralised and decentralised.

Why

As the name suggests, leverage amplifies the returns on a purchase. If a leveraged investment goes well, the gains are multiplied. However, if it does not go well, the same is true for losses.

Risk

Cryptocurrencies are notorius for their volatility as they are. This is partially because of the prevalence of leverage in crypto markets; levered speculators often end up forcibly liquidating their positions on relatively small price moves, further adding to the momentum.

Reward

Besides multiplying gains, leverage on crypto exchanges can be used to alleviate counterparty risk. By depositing only a part of our funds and placing a leveraged bet on a coin, we can limit the risk of losing all our money if the exchange goes down, for example.