Leveraged Trading: Concepts and Implications

Leverage is a financial mechanism that allows one to control a trading position of a value much greater than the actual initial investment. It is often used interchangeably with the concept of margin in the context of cryptocurrencies, although there is an important nuance: unlike margin trading where the exchange lends money with interest, leverage is not a loan to be repaid with direct interest. However, the two concepts are closely related and refer to the use of borrowed funds to increase market exposure.
The appeal of leverage lies in its potential to generate high returns with a relatively low initial capital. However, it is crucial to understand that leverage amplifies not only potential gains but also, equally, losses. This means that a trader can risk losing more than their initial deposit. "Margin" is the collateral required to open and maintain a leveraged position. For example, a 10x leverage with a 10% margin means that the trader only deposits 10% of the total value of the position.
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