Question

some crypto exchanges allow their customers to employ leverage and why is this not a good idea , acording to Fool proof what best decribes this sentence

Answer 1

Leverage works both ways our cash account is down 10% if bitcoin goes the opposite way, from $30,000 to $27,000. However, if we were using a 10:1 leverage, our margin deposit is now gone. A decrease results in a margin call for our account and a demand for extra funds, failing which we will be sold out (or bought in if you are short). This is why  employing leverage crypto is not a good idea.

How leverage on crypto works:

If we want to possess 1 crypto for $30,000, we have two options: we can either purchase it in our cash account for $30,000 or we can purchase it in our margin account with 10x leverage and a $3,000 margin deposit. The remaining balance of the transaction in our margin account is provided by a loan of $27,000.

If BTC increases by $3,000 to $33,000, we will make a 10% profit in our cash account after deducting any expenses.

The margin account, on the other hand, has a profit of 100% less any costs once the loan is repaid and the interest on the loan.

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