Published on 
13 July, 2021

What is Leverage?

In the “crypto” world there are many concepts that we use regularly, such as decentralization, blockchain, collateral, peer-to-peer, stake, DEX, and several of them, although we use them, sometimes we don't really know what they mean.

Disclaimer: This post contains a mention of the leveraged position BTCX, which was removed from the protocol to simplify the Money On Chain model through its decentralized governance process. To learn more about it, we recommend reading the publication Simplification of the Money On Chain model

We keep telling you about BPro and its little free leverage and BTCx and its 2x leverage. 

But, what is leverage?

Leverage is the use of a loan to increase your operating capacity (investment), giving you enough power to take advantage of investment opportunities without having all the necessary capital in your vault.

Leverage is applied in multiples of the invested capital: 1.1x, 2x, 5x, 10x, and so on. It refers to the relationship between the loan and the invested capital. So the higher the leverage, that is, this relationship with our original capital, the riskier the investment is.

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The difference from a regular credit or loan is that it is intended to obtain a return, that is, to obtain a profit from a capital that you do not have.

Leverage allows you to “amplify” your gains, but -beware- also your losses. This is why you must understand well what you are doing and not invest more than what you are willing to lose.

It can be used both for long positions (buy), that is, take a loan in stable currency to buy an asset that you think will rise in price. And for short (sale), that is, taking a loan from an asset that you think will lower its price, sell it and keep it in a stable currency, for when it goes down, buy again and pay the loan obtaining a profit.

In the event that the operation does not turn out as planned, the losses are deducted from the capital offered as a guarantee, if this guarantee runs out, there are two ways to proceed: deliver more funds to support that guarantee or not, in which case losses are assumed and the capital contributed is liquidated.

In the case of BPro and BTCx, there is no loan involved, but the same effect is achieved since the DoC Holders yield the rBTC volatility they contributed to the protocol to the other participants.

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