Is Leverage a Cost to the Trader?
Leverage itself is not a direct cost to the trader, as the exchange does not charge interest on the "borrowed" capital. However, the use of leverage exposes the trader to potential costs.
These include the funding rate payments and the increased transaction fees, which are calculated on the full notional value of the leveraged position.
Glossar
Hidden Costs
Slippage ⎊ Hidden costs in derivatives trading often include slippage, which is the difference between the expected price of a trade and the price at which it is actually executed.
Cost of Leverage
Interest ⎊ The primary component of the cost of leverage manifests as the interest or funding rate paid to maintain leveraged positions in crypto or margin accounts.
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.
Notional Value
Scale ⎊ quantifies the total value of the underlying assets represented by outstanding derivative contracts, irrespective of the actual capital exchanged.
Transaction Fees
Fee ⎊ Transaction fees, inherent in cryptocurrency, options, and derivatives markets, represent the cost of executing trades and utilizing network infrastructure.
Funding Rate Payments
Mechanism ⎊ Funding Rate Payments represent periodic exchanges calculated by derivatives exchanges to equalize the price of a perpetual contract with the underlying spot market, mitigating price discrepancies and ensuring contract convergence.