Asset leverage involves using borrowed capital to amplify the potential returns from an investment in digital assets. Participants can acquire a larger position in an asset than their initial capital would permit, typically by pledging existing assets as security. This strategy increases exposure to price movements, potentially yielding magnified gains or losses. It represents a common financial instrument in both traditional and decentralized markets.
Context
Asset leverage remains a central, often debated, aspect of cryptocurrency trading, influencing market volatility and risk profiles. Its use is prevalent on centralized exchanges and within decentralized finance lending protocols, where over-collateralization is frequently required. A critical discussion point involves the appropriate level of leverage and the associated risks of liquidations during periods of market downturns. Regulatory bodies are increasingly scrutinizing leveraged trading offerings to protect market participants.
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