Financial Leverage

Definition ∞ Financial Leverage involves using borrowed capital to increase the potential returns of an investment. In the context of digital assets, this typically means trading cryptocurrencies with funds supplied by a third party, amplifying both gains and losses. It allows market participants to control a larger position than their initial capital would permit. This practice introduces heightened risk alongside the potential for increased profit.
Context ∞ News reports frequently analyze the role of Financial Leverage in cryptocurrency market volatility and large price swings. The availability and use of leverage on centralized and decentralized exchanges are critical factors in market dynamics. Debates often focus on the risks associated with excessive leverage, particularly during periods of high market stress, leading to rapid liquidations. Regulatory bodies globally are increasingly scrutinizing leveraged trading offerings in the digital asset space, potentially impacting future market structures.