Hello, I know the purpose of leverage but I am struggling to understand how does it work in bybit for example? How does it make it riskier and potentially more profitable ?
good question. I actually don`t use Bybit but from time to time i trade with leverage on Kraken exchange and i assume that procedure and philosophy behind is the same.
I will just give you an example with round numbers so it will be easy to understand.
s say you have 1000€ in your account to trade. You can maximize your profit by using leverage which means that you borrow extra funds from your exchange and using your 1000€ as collateral. I dont know for Bybit but Kraken offers you up to 5:1 leverage (on futures all the way to 100:1 but i don`t trade futures).
So let`s say you take 5:1 leverage which essentially means that Kraken gives you 4000€ of their own money on top of your 1000€. This means that you have a 5000€ of buying power.
Now let`s say that BTC is worth exactly 5000€. This means that with only 1000€ of your own money you are able to buy 1 BTC (if price of BTC is 5000€).
If BTC than goes up to 7000€ you are actually up 2000€ because you have bought whole BTC. If you than sell your position when BTC is 7000€ you actually made 2000€ profit so you now have 3000€ of your own money (1000€ of your initial deposit + 2000€ profit from BTC trade). Sounds really good but BE VERY CAUTIOUS because BTC could also go the other way and in that case the result could be a very big loss and your are even risking to loose whole investment very fast!
So if you make that same trade by buying 1 BTC with your 1000€ (using 5:1 leverage) and BTC goes down to 4000€ that actually means that you have already lost everything and your position will be closed by an exchange. Because your collateral was 1000€ and your collateral is taken first so when you don`t have enough funds exchange will issue a margin call and close your position.
So while using leverage is very exciting and can be very profitable it can also be very, very risky so you need to be very careful with using leverage. Especially if you are new to the trading.
I hope i have helped you with this
@Tonis maybe this article can help you…