What is leverage?

Imagine holding a lever: with less force you move a heavier weight, but if it slips, the weight doesn’t get any lighter. In crypto trading, the leverage multiplier, such as 5x or 10x, shows how much larger your position’s value is than the capital backing it.

For example, you put up €100 as margin and open a long position worth €1,000 with 10x leverage. If the price rises 2%, your profit is about €20, or 20% on your €100. If it falls 2%, your loss is likewise €20. The example assumes a linear contract and doesn’t include fees or other charges.

In margin trading, the larger position is usually backed by borrowing. With derivatives, such as futures contracts, you gain exposure to the price movement through a contract, without necessarily borrowing or owning the cryptocurrency itself.

Why it matters

Leverage multiplies the effect of price changes on your capital, not the accuracy of your prediction. A move that in the spot market would mean a limited loss of value can quickly wipe out your margin in a leveraged position.

It’s also used for hedging, meaning to limit the impact of an adverse move on another position. We think the distinction is crucial: a tool being useful doesn’t make it any less risky.

What to watch out for

If your available margin drops below the required threshold, the platform may forcibly close the position. That’s liquidation. With 10x leverage, you don’t have a guaranteed 10% cushion against an adverse move: liquidation usually comes sooner, because of maintenance margin requirements and fees.

With isolated margin, the collateral is limited to that specific position. With cross margin, other available balance in the relevant account can also be used. The exact rules depend on the platform. Also, a stop-loss order doesn’t guarantee execution at the chosen price when the market moves sharply.