Part 2/10:
Leverage involves utilizing borrowed capital to increase one’s investment potential. While leverage is a well-established practice in traditional financial markets, its application in cryptocurrency is particularly volatile due to the market's inherent unpredictability. In crypto, investors typically engage with leverage through collateralized lending or trading via futures and perpetual contracts.
Collateralized Lending
In collateralized lending, investors use their cryptocurrencies as collateral to borrow stablecoins or other assets, which they then reinvest to increase their crypto holdings. However, if the value of the collateral drops sharply, lenders can liquidate the assets to recover their loans.