How leverage can help with Bitcoin’s price discovery

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

Yet leverage and margin trading, in general, can help “turbo-charge” demand for an asset. They can also free up capital, thus increasing liquidity within a given market as traders look to use their capital elsewhere.

It’s an investment strategy of using borrowed money for the use of various financial tools to increase the potential return of an investment.   

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.

For example, 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.

 

Why leverage matters for bitcoin

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. It also provides professionals and retail investors with additional tools to capture value in the crypto market. In effect, greater demand on the asset class vastly improves the potential for more accurate value capture through organic price discovery.

Participating in a live panel discussion at Invest: ASIA in Singapore, Lennix Lai, financial market director at OKEx told Coindesk: