These are the opportunities and risks

March 6th, 2021, 5:01 pm

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Investing with leverage offers special opportunities not only in the world of cryptocurrencies. Here you can find out what is behind the technology, how it works, what the risks are and how you can use them for your investment.

What is a lever?

Lever-based trading is not uncommon in the speculative stock market space. Investors have long recognized the opportunities this method offers with regard to cryptocurrencies and are taking advantage of them. The technology can be implemented, for example, with a future in which the base price is below the current price of the base value. This results in a leverage effect in which the performance of the futures corresponds to a multiple of the performance of the cryptocurrency.

How does the implementation look in practice?

Leverage is possible with many globally traded crypto currencies such as Ethereum or Bitcoin. To implement the technology, it is not even necessary to have a wallet with your own coins. Instead, you can trade with CFD and participate directly in price developments. A CFD is what is known as a contract for difference. In contrast to securities such as stocks, you do not invest directly in the company, but only obtain a claim. Participation takes place exclusively in relation to an underlying asset, which can also be a coin.

If the CFD are not provided with leverage, they track the price development of the coin one to one. If, on the other hand, they are equipped with a leverage of, for example, ten, the CFD increases by 100 percent if the coin increases by 10 percent. This is the reason why many users of cryptocurrencies like ether are interested in these types of securities.

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What are the risks?

If you want to trade in leveraged securities and make money with cryptocurrencies like Bitcoin, you should keep an eye on the risks involved. The lever always works in both directions. If you buy a crypto CFD with a leverage of 20 and the price drops by 15 percent, you will quickly lose your position completely. Corresponding investment products are therefore considered to be sophisticated and are more suitable for experienced investors.

Many CFDs have a so-called stop-loss barrier. If the value falls below or exceeds a certain threshold, a previously defined residual value is paid out. This will limit the losses.

What are the potential profits and how can I use them?

Leverage products exist in a variety of variants for different coins such as ether. They are aimed at investors with a low and high risk appetite. Products with a leverage of 1.5, for example, are already considered conservative, even if the performance of the leverage paper exceeds that of the cryptocurrency by 50 percent. However, leverage of 10 or 20 is also possible. The potential profit opportunities and the associated risks are correspondingly high.

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