Leverage refers to using borrowed capital to open a trading position, which can amplify the potential gains or losses. The main leverage methods available in crypto are margin trading, futures, and options contracts. What Does Leverage Mean? There are several risks associated with crypto leverage trading, including volatility, liquidation, interest costs, and counterparty risk. Leverage refers to using borrowed capital to open a trading position, which can amplify the potential gains or losses. Risk management is paramount, and responsible leverage used smartly can be an effective tool to enhance trading returns.

With leverage, you control a position worth $10,000 (10x investment), but remember that leverage amplifies both profits and losses: While it can maximise gains, it increases risk. If BTC rises 1% to $60,600, profit is $100 (1% x $10,000), meaning a 10% gain on initial capital of $1,000. If BTC drops 1% to $59,400, loss is $100 (1% of $10,000), meaning a 10% loss on initial capital of $1,000. In this example, a 1% BTC price move results in a 10% gain or loss due to 10x leverage.

Liquidation: In leveraged trading, the borrowed funds act as collateral. This can impact the overall profitability of leveraged positions. Learn more about margin calls. Counterparty Risk: Engaging with leveraged positions through exchanges or borrowing platforms exposes traders to counterparty risk. Interest Costs: Margin trading often involves paying interest on the borrowed funds. If the market moves unfavourably, failure to meet margin calls could mean the position is liquidated by the exchange to cover losses. Dependence on these platforms for leveraging funds can subject traders to potential platform failures, hacks, or insolvencies, leading to loss of funds.

Traders deposit collateral capital as a margin. Similar to the above, traders deposit collateral capital as a margin and can then open positions valued at a multiple of that margin amount, therefore achieving leverage. Can then open positions valued at a multiple of that margin amount. Crypto futures contracts allow traders to take long or short positions on cryptocurrencies without having to own the underlying asset. Read more about crypto spot. Daily price fluctuations result in profits or losses being settled to accounts each day through a process called ‘marking to market’. Maintenance margin levels that may trigger forced liquidations if not maintained. Profits or losses are realised when positions are closed out. Note that exchanges set margin requirements.