Hello everyone I am CYPER and today I am going to explain what is leverage in PCEX Futures?
You may have heard this word a lot of times while trading in the futures market on different exchanges. But, what does that mean?
Leverage is the ability to control a large contract value with a relatively small amount of capital. It is also referred to as the initial margin in futures trading and is typically between 5% to 10% of a contract’s notional or cash value.
This magnifies both the opportunity and the risk.
Let’s understand this with an example.
Let’s say you are interested in investing Rs. 10,000 and you think that the price of BTC is going to surge in the coming days. If the price of 1 BTC is Rs. 1,000 you can buy 10 BTC with Rs. 10,000.
As an alternative of buying digital assets, you could use leverage or margin offered in the futures market. For instance, Rs. 10,000 margin deposit will allow you to buy 1 BTC/C2USD futures contract lot of 100. This futures contract would give you exposure to the price change of 100 BTC using the same amount of capital.
With the same amount of capital, your gain or loss magnifies upto 50X times as compared with buying the digital asset in the spot market.
Let’s compare the gain or loss scenario in both the spot and futures market. In both scenarios, our total amount of investment is Rs. 10,000.
We will ignore the trading fees charged by exchanges here. If you have invested in 10 BTC in the spot market a price change of Rs. 10 would be your gain or loss of Rs. 100. On the contrary, if you have invested in 1 BTC /C2USD futures contract then the same little price change would be your gain or loss of Rs. 1,000 and thereby giving you a return of more than 100%.
Futures leverage magnifies both profit and loss risk. Keep this in mind while investing in the futures market.