What Is Leverage?

Leverage is usually expressed as a multiplier such as “10x.” An investor using 10x leverage with $1,000 of collateral opens a $10,000 position. If the price moves 5% in their favor, the gain is $500, or 50% of the collateral; if it moves 5% against them, the loss is of the same proportion. On cryptocurrency exchanges, leverage is used mostly in futures, especially perpetual contracts, and in margin trading; some DeFi protocols also offer leveraged positions.

The most important risk of leverage is liquidation. When losses erode the posted collateral down to a certain threshold, the exchange automatically closes the position and all or most of the collateral is lost. As leverage increases, the liquidation price moves closer to the entry price: at 10x leverage, an adverse move of about 10% can wipe out the collateral, and at 50x, about 2%. The high volatility of the cryptocurrency market raises this risk further.

Leveraged positions also carry extra costs such as funding fees and interest. In many countries, regulators limit leverage ratios for retail investors. Stop-loss orders and low leverage can help limit risk, but they do not eliminate it.