Crypto trading has opened up exciting opportunities for people to earn from price movements in Bitcoin (BTC), Ethereum (ETH), and many other digital assets.
One of the most talked-about tools today is leverage in crypto trading.
You’ve probably heard people say things like “I used 10x leverage” or “I got liquidated using 100x.”
But what does that mean? This guide will explain what leverage in crypto trading is, how it works, the risks, and how to use it wisely.
What is Leverage in Crypto Trading?
Leverage allows you to borrow money from a crypto exchange to trade a larger amount than what you own.
You can think of it like using a loan to boost your potential gains in a trade.
Simple Example of Leverage in Crypto Trading
Let’s say you have $100 and use 10x leverage to trade Bitcoin.
This means you’re borrowing $900 from the platform, so you’re trading with $1,000 in total. If Bitcoin goes up just 5%, you make $50, that’s a 50% gain on your $100!
But if Bitcoin drops 10%, you lose your entire $100.
Leverage lets you trade big with little money, but the risks go up too.
Notably, there are several leverage levels you can use to trade depending on the exchange used and the crypto asset. Ranging from 1x to 125x, different platforms offer different levels of leverage for different crypto assets.
While high leverage might seem exciting, beginners should stick to lower levels like 2x to 5x to reduce risk and exposure.
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What are Leveraged Tokens in Crypto?
Leveraged tokens are crypto assets that allow you to gain leveraged exposure to the price movements of cryptocurrencies without directly using margin or borrowing funds. These tokens represent a basket of futures contracts and are designed to automatically manage risk, margin, and liquidation for you.
They are also designed to multiply the daily returns of a particular asset.
For example, a 3x long Bitcoin token aims to return 3 times the daily movement of Bitcoin’s price.
Unlike traditional leveraged trading, leveraged tokens are easier to use and don’t require constant monitoring or risk management.
However, they are best suited for short-term trades because their value can decay over time due to daily rebalancing.
How Does Leverage in Crypto Trading Work? The Good and the Bad
Leverage in crypto trading can feel like a shortcut to making quick profits, but it can also backfire quickly. Here’s a breakdown of the benefits and risks.
Pros of Using Leverage
- Amplified profits: If you make the right trading call, your returns will be much higher than trading without leverage.
- Short-term gains: Using leverage is ideal for crypto traders who want to take advantage of small price movements over short periods.
- Efficient capital use: You don’t need a lot of money to trade large positions. Leverage allows traders to gain more exposure to the market than their actual balance would normally permit. This can be useful in highly bullish or bearish conditions.
- Flexible trading strategies: Leverage can be used for both long and short positions. Whether the market is going up or down, traders can benefit, as long as they make the right call.
Cons of Using Leverage
- Amplified losses: A small price deviation against your price expectations can lead to large losses.
- Liquidation risk: If the market moves against you too far, your position can be forcibly closed, and your total margin or wallet balance lost.
- Emotional pressure: Watching a highly leveraged trade can be stressful and lead to poor decisions.
- Complexity for beginners: Leverage trading involves understanding advanced concepts like margin, collateral, and liquidation. Without proper knowledge and experience, beginners may find themselves overwhelmed and prone to costly mistakes.
- Market volatility can be brutal: Crypto is known for extreme price swings. When using leverage, even a sudden market spike or dip caused by news or whale activity can result in unexpected losses or forced liquidation.
- Compounding fees and interest: Some platforms charge fees for borrowed funds or overnight positions. Over time, these costs can eat into profits or deepen losses, especially if a trade is left open for long.
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Leverage Risk-Reward Table
| Trade Scenario | Without Leverage | With 10x Leverage |
|---|---|---|
| Your capital | $100 | $100 |
| Trade size | $100 | $1,000 |
| Price moves up 10% | +10% | + $100 |
| Price moves down 10% | -10% | – $100 (Liquidated) |
Key Terms Beginners Should Know
Understanding the following terms will help you use leverage in crypto trading more safely:
- Margin: This refers to the amount of your own money you put up to open a leveraged trade. It acts as a deposit or security. For example, in a 10x leveraged $1,000 trade, your margin is $100.
- Liquidation price: The price point at which you lose all your margin, causing the trading platform to automatically close your trade(s). The higher the leverage, the closer the liquidation price is to your entry point. For example, If BTC price drops slightly against your leveraged long position, you may get liquidated quickly at high leverage.
- Collateral: The asset you use to back your trade. It can be crypto or stablecoins like USDT. If your trade fails, your collateral is what’s at risk.
- Isolated Margin: The Isolated margin concept limits the margin (collateral) used for a position to a fixed amount. When you engage in leverage trading using an isolated margin, only the funds you assign to that specific trade are at risk, not your entire account balance.
- Cross Margin: Cross margin uses all the available balance in your account to avoid liquidation. In other words, your entire account balance can be used to support an open position.
- Long Position: A long position is when a trader bets that the price of an asset will go up in value.
- Short Position: A short position is when a crypto trader bets that the price of an asset will decrease in value.
- Liquidation: Liquidation happens when a trader’s position is automatically closed by the exchange because they’ve lost most or all of their margin (collateral). This typically occurs when the market moves against the trader’s position and their account no longer holds enough funds to cover potential losses.
Types of Leverage in Crypto Trading
Here are the most common types of leverage in crypto trading.
1. Leverage by Borrowing
This means you borrow money or crypto from a platform to make bigger trades than your own funds allow. You’re expected to return the borrowed amount with interest.
Example: You have $100, borrow $400, and trade with $500 total—this gives you 5x leverage.
It increases your buying power but also your risk.
2. Leverage with Margin Trading
Margin trading lets you borrow funds directly from the exchange to increase your trade size. You’ll need to keep a portion (called margin) as collateral.
Example: With 3x margin, your $200 opens a $600 position.
If the trade moves against you too much, your position can be liquidated.
3. Leverage with Perpetual Futures
These are contracts that let you bet on crypto prices going up or down, without an expiry date.
You can choose high leverage (like 10x, 20x) to multiply your trade size.
Example: With 10x leverage on $100, you control a $1,000 futures position.
Small price changes mean big gains—or big losses.
4. Leverage with Options
Options give you the right (but not the obligation) to buy or sell crypto at a set price later. You pay a small premium for the chance to control larger positions.
Example: You pay $50 for an option that gives you exposure to $1,000 worth of ETH.
If the market moves in your favor, the return can be much bigger than what you paid.
5. Leverage with Tiered Tokens (Leveraged Tokens)
These are special tokens that automatically maintain a set leverage, like 2x or 3x. No need to worry about borrowing or liquidations—just buy and sell like any other token.
Example: BTC3L gives 3x the daily move of Bitcoin; if BTC goes up 2%, you gain 6%.
However, they work best short-term and can lose value quickly in choppy markets.
6. Leverage with Liquid Staking
You stake your crypto (like ETH) and get a “liquid” version (like stETH) that can still be used in DeFi. You can then borrow or trade using that staked token as collateral.
Example: You stake ETH, get stETH, and use it to borrow more ETH for trading or yield.
It boosts your returns but adds risk if prices drop.
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Tips for Using Leverage in Crypto Trading
Leverage can help, but only when used wisely. Here are smart tips to keep your money safe:
- Start with low leverage (2x–5x): High leverage is tempting but dangerous.
- Never trade more than you can afford to lose: Losing your capital is always a possibility. Therefore, only risk what you can afford.
- Always use a stop-loss: A stop-loss automatically closes your trade at a set level to limit losses.
- Practice with demo accounts until you master leverage in crypto trading: Many platforms let you simulate trades without risking real money.
- Learn technical and fundamental analysis
- Avoid emotional trading: Fear and greed can ruin even the best strategy. Therefore, it’s important to stick to your trading plan at all times.
Spot Trading and Leverage Trading: What’s the Difference?
Spot trading and leverage trading are two very different approaches to crypto. Spot trading involves buying or selling crypto using your funds at a particular market price.
You fully own the asset and can hold it, sell it, or transfer it anytime. It’s simple, low-risk, and ideal for beginners learning the ropes.
On the other hand, leverage trading allows you to borrow money from an exchange to open bigger positions than your actual balance.
While this can multiply your profits, it also increases your losses. You can even lose your entire margin if the market moves against you, a situation called liquidation.
For beginners, spot trading is the safer and smarter choice. It helps you understand market movements without the emotional pressure or financial risks that come with leverage.
As you gain experience, you can consider leverage trading using low leverage levels and strict risk controls.
Conclusion
Leverage in crypto trading is like a double-edged sword.
It can make your money grow fast, but it can also wipe out your capital in seconds.
If you’re a beginner, it’s better to take time to learn and start small until you have mastered the concept of leveraging.
Over time, with experience and proper risk management, you can unlock the full potential of leveraged trading without burning your capital.
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FAQs about Leverage in Crypto Trading
What is the best leverage for crypto?
The best leverage depends on your risk tolerance. Beginners should stick to low leverage like 2x–5x.What is 20x leverage on $100?
It means you can trade with $2,000 using just $100 as a margin.Does leverage increase profit?
Yes, it multiplies both your potential profit and potential loss.How much leverage should I use in crypto?
Use low leverage (1x–5x) if you’re new; higher leverage is riskier and for experienced traders.What happens if you lose a leverage trade?
You can lose your entire margin, and your position may be liquidated automatically.
