Leverage is the ability to use borrowed capital as a source of funding to invest or trade in open markets. It is an investment tool by using borrowed money to increase the potential of return of investment.
Note: Leverage can also refer to the amount of debt used to finance assets. When a company, property or investment as "highly leveraged," it means that item has more debt than equity.
Using leverage when trading Bitcoin gives traders an option to trade larger amounts even with small capital. In this context, the Bitcoin trading sector functions much like its experienced counterpart, the forex trading sector that also offers similar options to its traders.
For instance, a 50x leverage represents the ability of the trader to place trades 50 times more than their actual capital. If you have $1 and borrow $50 leverage to trade Bitcoins, when the price action moves in your favour by 1%, it will result in a profit of $1. If you have a larger amount to trade - let’s say $50,000 against your original capital of $1,000 - that same price action of 1% increase in Bitcoin will result in an eye-popping $5,000 in return.
Conversely, if the price action moves against your favour, the loss will amount to as much as the profit. When you are leveraged, there are more risks involved. In as much as there is a lot of potential for turning a profit in a risky trading method, there is also just as much potential for losses.