Leverage in crypto trading: a tool with maximum risk

The Essence of Leverage Principle

Margin trading is borrowing funds to expand trading positions beyond the available capital. Instead of risking their own money in full, a trader makes an initial deposit, and the exchange provides the remaining funds.

How it works in practice:

Suppose you have $100, but you want to open a position of $1000. With 10x leverage, your $100 will become the trigger for controlling an asset worth $1000. The exchange provides the missing $900 as a loan, and your deposit serves as collateral ( margin) for this loan.

Where leverage is applied in crypto

In the cryptocurrency sector, leverage is primarily used in two instruments:

Margin trading - you borrow a crypto asset, sell it, and then buy it back, betting on a price drop. This allows you to open short positions without owning the underlying asset.

Perpetual futures are contracts with no expiration date, where leverage is built into the mechanics of trading. Here, profit or loss depends on the ratio between long (buy) and short (sell) positions.

Key Parameters When Trading with Leverage

Initial margin

This is the minimum amount required to open a position. The size depends on the chosen leverage ratio.

Example: do you want to invest $1000 in Ethereum (ETH) with 10x leverage? Initial margin = $1000 ÷ 10 = $100. This means you need to have exactly $100 as collateral.

With a 20x leverage, this amount is reduced to $50, but the liquidation risk grows exponentially.

Maintenance Margin

After opening a position, you need to maintain a minimum margin balance. If the market moves against you and the margin falls below the established threshold, the exchange will send a margin call - a notification to top up the account.

If the balance falls even lower, an automatic liquidation will occur — the position will close at a loss.

Trading Examples: Where the Money Is and Where the Losses Are

Long position (bet on growth)

Scenario: you opened a long position on Bitcoin (BTC) at $10,000 with 10x leverage, depositing $1,000 as margin.

• If BTC increased by 20%: the position is profitable at $2000 (without fees). The profit exceeds the initial investment by 20 times.
• If BTC dropped by 20%: the position incurs a loss of $2000, which consumes your entire margin and leads to liquidation. Even a drop of just 10% can trigger a forced position closing.

Conclusion: a long position amplifies both profit and loss multiple times.

Short position ( bet on decline )

You borrow 0.25 BTC at a price of $40,000 and sell for $10,000. The collateral is still the same $1000 (10x leverage).

• If BTC fell by 20% to $32,000: you buy back 0.25 BTC for $8,000, pay back the loan, and secure $2000 profit.
• If BTC rises by 20% to $48,000: to buy back 0.25 BTC will require $12,000, but you only have $1000 in collateral. The position is liquidated, money is lost.

Why traders use leverage ( and why it is dangerous)

Advantages:

• Increase in potential profit even on small price movements
• Liquidity preservation: instead of freezing all capital in one position, part of the funds remains available for other strategies like staking, trading other assets.

Critical Risks:

• The volatility of cryptocurrencies means that a 1-2% price movement with high leverage can completely wipe out a deposit.
• Liquidation occurs automatically and ruthlessly — there's no time for reflection.
• Commissions and spreads further reduce profit

How Not to Lose Everything: Risk Management with Leverage

Rule 1: start with low leverage

Many exchanges limit beginners to a leverage of 2-5x for their protection. Don't rush to 100x — it's not the end, but a direct path to losing your deposit.

Rule 2: use stop-loss and take-profit

• Stop-loss will automatically close a losing position when a certain price is reached, limiting losses.
• Take-profit will secure profit when the price reaches the target level.

Both orders operate without your involvement — even if you are sleeping, the orders will be executed.

Rule 3: never use maximum leverage

If the exchange offers 100x leverage, set your limit to 5-10x. A buffer saves accounts.

Rule 4: constantly monitor the margin

Do not rely solely on the margin call from the exchange — actively monitor the position's status. The market can move faster than you can react.

Rule 5: only trade amounts that you are willing to lose

This is especially important when using leverage. Even skilled traders can incur losses in a volatile market. Never go into margin with money for housing, treatment, or education.

Results

Margin trading is a double-edged sword. On one hand, it allows for significantly greater profits and more efficient capital management. On the other hand, it turns any mistake into a disaster.

The main rule: leverage works both ways. It does not create money out of thin air — it only amplifies the result of your decisions. If you incorrectly predict the market's direction, leverage will turn a small loss into a complete loss of your deposit.

Before opening a leveraged position, make sure you fully understand the mechanics of margin, liquidation, and risks. Practice with small amounts, refine your risk management strategy, and only then increase your trading scale.

The cryptocurrency market is not going anywhere. Even if you miss one super-profitable deal, there will be others. But losing your deposit is already the final result.