**work in progress.**

We’re working hard to add more content to make this page more helpful.

Leverage is a concept in finance that relies on using borrowed funds to increase returns (and risk).

It's an incredibly powerful, (yet dangerous) tool that I think newcomers to the space don't understand too well.

Here’s a graphic that explains it

## An example:

__ Without Leverage:__
You start with $100 and buy $BTC.
BTC does a 2x, and you now have $200.
Profit = $100
ROI = 100% (Profit / initial investment)
No leverage is being used here

**With Leverage:**

Now suppose you borrow an extra $50 from the bank at 10% interest.

You now have $150 that you use to buy BTC.

**Case 1: $BTC does 2x**

BTC does a 2x, and you now have $300.

After returning the borrowed $55 ($50 principle + $5 interest) to the bank, you have $245.

**Profit = $145
ROI = 145%**

**Case 2: $BTC dumps 50%**

In the example above, you borrowed some money at 10%, but your investment appreciated by 100%, so you were able to amplify your returns.

Now let’s take a look at the risk side of things. What if BTC goes down by 50%?

Without borrowing: $100 —> $50, so your ROI = –50%

With borrowing:

You start with $100. You borrow $50 at 10% interest.

You buy $150 of BTC. BTC goes down 50%.

You now have $75, and you owe $55 to the bank, leaving you with $20.

**Loss = $80
ROI = – 80%.**

Hopefully, this example illustrates how leverage can amplify both your risks and your returns.

**Don’t be greedy.**

**If you do use leverage, be VERY conservative with it.**

Mortgages are probably the most common form of leverage.

You are buying a house for $500k.

You put a 20% down payment on a house ($100k).

You borrow the other 80% ($400k) from the bank.

You are now leveraging an asset (house) worth $500k, having put down only $100k.

**If the house price goes up 10% in 1 year to $550k.**
Profit = $50k
ROI = 50% (minus mortgage interest)

**If the house price goes down 10% in 1 year to $450k**
Loss = – $50k
ROI = –50%

10% move = ± 50%.

That’s leverage.

Leverage is everywhere. Keep your eyes peeled, and you’ll see it all around. Examples:

- Options and futures are leveraged instruments for equities.
- Buying stocks on margin
- Mortgages
- Companies borrowing money to fund operations
- Hiring employees

Hope you found this useful. It’s not directly about #Crypto or #DeFi like my usual threads, but it’s a very important concept, that a lot of people don’t understand well enough. Be careful with leverage.

**Like fire, it’s a tool that can be used well, or poorly.**

In Crypto / DeFi, there are many ways to use leverage to boost your #DeFi returns

Here's a sneak peek: