Leverage in crypto trading: how the margin capital mechanism works

Basic Principles

The size of leverage determines how much more capital can be used for a position than what is available in the balance. It is a borrowing tool that allows traders to open large positions with a minimal initial deposit. However, it also significantly increases both potential profits and the risks of losses, especially during periods of high market volatility.

In the cryptocurrency space, this mechanism is used when dealing with perpetual futures contracts and margin trading. Calculations show that careless use of high leverage can lead to a complete loss of the deposit even with small price movements.

How the borrowing mechanism works

When a trader decides to trade with leverage, he provides a certain amount as collateral (security), and then can borrow additional funds to increase the size of the trade.

The leverage ratio is denoted as 1:5 (5x), 1:10 (10x), 1:20 (20x) and shows how many times the initial capital is increased. For example, with a capital of $100 and a leverage of 10x, one can open a position of $1000.

On some platforms, the maximum leverage can reach 100x, although such ratios are recommended only for experienced participants. When starting trading, it is important to understand that each increase in leverage exponentially increases risks.

Initial and maintenance margin: two key parameters

Initial margin is the minimum deposit required to open a position on a futures contract. Its size depends on the chosen leverage and the volume of the position.

Suppose you want to invest $1000 in Ethereum (ETH) with a 10x leverage. The initial margin will be 1/10 of $1000, which is $100. If you choose 20x leverage, the margin will decrease to $50. However, remember: the higher the leverage, the closer you are to the liquidation threshold.

Maintenance margin is the minimum level of funds in the account required to maintain an open position. When the market moves against your position and the margin falls below this threshold, you need to top up your balance, otherwise the position will be automatically liquidated.

The difference between these two concepts is critical: the initial margin opens a position, while the maintenance margin keeps it. Many beginners confuse these terms and end up in liquidation due to lack of funds.

Long Positions with Leverage: Example

Suppose you open a long position in Bitcoin (BTC) for $10,000 with 10x leverage. Your margin is $1,000.

If the price of BTC increases by 20%, your position will yield a profit of $2000 minus fees (. This is ten times more than you would have earned without leverage — just $200. This multiplied profit is the main reason why traders take risks.

But here is the reverse scenario: if the price of BTC drops by 20%, the position will lose $2000. Since your collateral is only $1000, liquidation occurs — the account is reset to zero. In fact, liquidation can happen even with a 10% drop, depending on the platform's parameters and the size of the leverage.

To avoid this, you need to either top up your balance by increasing the margin or use a smaller leverage size initially.

Short Positions with Leverage: The Mechanics of Short Selling

To open a short position in BTC at $10,000 with 10x leverage, a trader can either borrow bitcoins to sell )margin trading( or sell a contract through futures )futures trading(. In both cases, a collateral of $1000 is required.

Suppose the current price of BTC is $40,000. You borrow 0.25 BTC and sell it for $10,000. If the price drops to $32,000 ) by 20%(, you can buy back 0.25 BTC for $8,000, repay the loan, and keep )the profit.

However, if the price rises to $48,000 $2000 by 20% (, you will need ) additionally to purchase 0.25 BTC. In case of insufficient funds, the position will be liquidated. This is why shorts are considered riskier than longs for beginners: the price can potentially rise infinitely, while the price cannot fall below zero.

Examples of Losses: How Theory Becomes Reality

History shows that most losses in leveraged trading occur due to underestimating risks. A trader with $2000 in the account takes a 20x leverage, opens a position of $10,000 and waits for a 5% movement. However, the market often makes sharp candles of 3-5% in just a few minutes. The position is liquidated before the trader has time to react.

The volatility of cryptocurrencies makes the size of leverage a critically important parameter. BTC can drop by 10% in a day, and altcoins even more. With 10x leverage, such a drop would completely wipe out the deposit.

Risk Management: Stop-Loss, Take-Profit, and Discipline

Stop-loss is an order that automatically closes a losing position when a certain price is reached. This is your main tool for protection. If you opened a long position of $10,000 with 10x leverage, it is wise to set the stop at 5% below entry — this will preserve half of your deposit.

Take Profit is the opposite tool that automatically closes a profitable position. Instead of waiting for more profit and risking a market reversal, you lock in your profit at the target price.

Key discipline when trading with leverage:

• Start with a minimum leverage size of $500 2-5x(
• Never trade with all your funds
• Always set a stop-loss BEFORE opening a position
• Monitor the maintenance margin and maintain a reserve of 20-30% of the balance.

Why Traders Choose Leverage

In addition to increasing potential profits, there are other reasons. For example, leverage allows for more efficient use of capital. Instead of freezing ) to maintain a 2x leveraged position, one could use 4x leverage and freeze $2500, leaving the remainder for other trades, staking, or participating in DeFi protocols.

However, this logic is dangerous for beginners, as it often leads to excessive leverage and quick losses.

Why the Size of Leverage is So Critical

Leverage Size is not just a multiplier. It is an indicator of your vulnerability to market fluctuations. With 100x leverage, a price drop of 1% completely liquidates you. With 10x leverage, you need to withstand a drop of 10%. With 5x leverage, a drop of 20%.

That is why many exchanges limit leverage for new users to usually a maximum of 5-10x. Experienced traders know that the size of leverage should correspond to their skills and willingness to take losses.

The volatility of cryptocurrencies is significant: in one hour, BTC can fluctuate by 5-10%. This means that any leverage greater than 10x is practically a casino.

Key Findings

Leverage is a double-edged sword. It allows a novice trader to open a position like an experienced participant with $1000, but it comes with huge risks.

The main rule: only trade with funds that you are willing to completely lose. If you cannot afford to lose your entire deposit without affecting your life — do not use leverage.

Before you start trading with leverage, make sure you fully understand:

• How is the initial margin calculated for your position size
• What is the liquidation level at the current leverage?
• How stop-loss and take-profit work
• What is your tolerance for risk and losses?

Trading with leverage requires additional knowledge, discipline, and emotional resilience. Start with theory, then with small amounts on a demo account, and only then move on to a real account.

The cryptocurrency market does not forgive mistakes. The size of the leverage you choose is a choice between ambitious profit and financial disaster.