Does leverage affect profit and loss?
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Last updated
Last updated
Conclusion: Leverage does not affect profit and loss. The main function of leverage is to determine the required initial margin rate when opening a position. Choosing a higher leverage does not directly increase your profit.
For example, User A opens a long position of BTCUSD worth $20,000. Refer to the following table (Figure 1) to understand the relationship between leverage and initial margin.
1x
$20,000
(1/1) = 100%
$20,000 worth of BTC
2x
$20,000
(1/2) = 50%
$10,000 worth of BTC
5x
$20,000
(1/5) = 20%
$4,000 worth of BTC
10x
$20,000
(1/10) = 10%
$2,000 worth of BTC
50x
$20,000
(1/50) = 2%
$400 worth of BTC
100x
$20,000
(1/100) = 1%
$200 worth of BTC
Explanation:
The position value remains the same regardless of the leverage used.
Leverage determines the initial margin rate. The higher the leverage, the lower the initial margin rate, meaning the required initial margin is lower.
The initial margin amount is calculated by multiplying the position value by the initial margin rate.
Next (Figure 2), User A considers closing the $20,000 position at $60,000. Assuming the average entry price is $55,000, refer to the following list to understand the relationship between leverage, unrealized profit and loss, and profit and loss rate.
No matter what leverage is used for the same position ($20,000), the unrealized profit or loss will be the same at the same exit price ($60,000), i.e., 0.03030303 BTC. Therefore, using higher leverage does not directly increase profit.
Unrealized profit and loss are calculated using the following variables: position size, entry price, and exit price.
The larger the position, the higher the profit or loss.
The greater the price difference between the entry and exit prices, the higher the profit or loss.
Unrealized profit and loss rate is calculated by dividing unrealized profit and loss by the initial margin amount (B / A).
The higher the leverage, the lower the initial margin amount (A), and the higher the unrealized profit and loss rate.
1x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 1) = 0.36363636 BTC
0.03030303 BTC
8.33%
2x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 2) = 0.18181818 BTC
0.03030303 BTC
16.66%
5x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 5) = 0.07272727 BTC
0.03030303 BTC
41.66%
10x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 10) = 0.03636363 BTC
0.03030303 BTC
83.33%
50x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 50) = 0.00727272 BTC
0.03030303 BTC
416.66%
100x
$20,000
$55,000
$60,000
$20,000 / (55,000 * 100) = 0.00363636 BTC
0.03030303 BTC
1,000%
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