What Is Leverage in Crypto and How Does It Work?
Leverage is the tool that lets you open a position larger than the money you put in. It can multiply the result, up and down, and it's the main reason beginners get hurt in futures.
How leverage works
With 10x leverage, you open a $1,000 position using only $100 of margin. The exchange lends the difference. The result of the position is calculated on the $1,000, but your capital at risk is the $100 margin.
If the coin rises 5%, the position gains $50, which is 50% of the margin. If it falls 5%, it loses the same $50. A move of about 10% against the position would consume the whole margin.
Leverage and liquidation
The higher the leverage, the closer the liquidation price sits to the entry price. At 2x, the price would need to fall about 50% to liquidate a long. At 20x, a drop of roughly 5% may already be enough.
| Leverage | Move against (approx.) |
|---|---|
| 2x | about 50% |
| 5x | about 20% |
| 10x | about 10% |
| 20x | about 5% |
The figures are approximate and vary by exchange, because each one charges a different maintenance margin. See the calculation in how to calculate the liquidation price.
How to choose a safer level
- Start with low leverage, generally between 2x and 5x.
- Use isolated margin, to limit the loss on each position.
- Leave a buffer between the entry price and the liquidation price.
- Avoid raising leverage to "make back" a loss.
In funding arbitrage, the goal is not to multiply the gain with high leverage, but to use leverage only to free up capital, keeping liquidation far away. In Multi Arbitrage, you choose the leverage in the setup, and the bot watches the distance to liquidation.
A classic mistake: raising leverage to earn more
Many beginners raise leverage hoping to multiply the profit of a trade that looks good. The problem is that the same leverage multiplies the loss and brings liquidation closer. A normal market swing that would be irrelevant at 3x can wipe out the margin at 20x.
In arbitrage, the gain comes from funding, not from leverage. Raising leverage only serves to free up capital, and even then with care.
Leverage and cost
Leverage isn't free: fees are calculated on the position value, not on the margin. At 10x, a 0.06% fee on the position equals 0.6% of the margin. On short trades, that weighs. See maker and taker fees.
Related guide: how to avoid liquidation. See also all the crypto arbitrage guides.
Frequently asked questions
What is the best leverage?
There isn't a single one. For arbitrage and for beginners, low levels are more prudent, because they keep liquidation far away.
Does leverage increase arbitrage profit?
It increases the return on margin, but also the liquidation risk and the effect of fees. Use it with caution.
Is there leverage without risk?
No. Any level above 1x brings liquidation closer, and the higher it is, the closer it gets.
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This content is for information only and is not investment advice. Trading crypto derivatives involves a high risk, including the total loss of your capital. Past results do not guarantee future results, and the figures mentioned are examples. Before trading, check whether trading crypto derivatives is allowed in your country and what your tax obligations are. Assess whether the product suits your profile before investing.