How Leverage Can Help With Bitcoin's Price Discovery

Bitcoin is like any other asset class in that it captures value through organic price discovery conducted via trading activity on global exchanges.

It's also an efficient use of trading capital, valued by professionals because it allows them to trade large positions without committing 100 percent of their capital to a risky spot position.

A trader that wanted to buy a thousand tokens at $1 apiece would only require a $100 of trading capital, depending on the leverage used, thereby leaving the remaining $900 available for additional trades.

Often touted as the most liquid cryptocurrency asset available, BTC benefits from leverage and margin trading activity by allowing investors and traders to lock in a position while maintaining a portfolio of other cryptos.

Greater access to capital means greater liquidity, without actually increasing the number of traders in a given market.

While the total market capitalization of the crypto market has been on the slide alongside declining total volume, the pressures from a bear market can be offset through leverage and margin trading.

Of course, the rewards don't come without inherent risks, as a loss can lead to the liquidation of a trader's capital and force spot prices lower.

If the cryptocurrency underlying a trade moves in the opposite direction to what was expected, leverage can greatly amplify the potential losses.

To manage the risk associated, traders usually implement a strict trading style that includes the use of stop orders and limit orders designed to curb potential losses.

There are currently eight major exchanges that offer the ability to leverage crypto, with several others offering margin trading accounts such as Kraken, Binance and Deribitm, while Bakkt's release of its futures product on Sept. 23 adds to the opportunities for more authentic price discoveries.