Leverage and Margin
What is Leverage
Leverage means controlling a large position with a small amount of capital. 10x leverage means you can open a $10,000 position with just $1,000. The remaining $9,000 isn't borrowed from the exchange - rather, the contract structure allows your margin to bear the profit/loss of that larger position size.
Leverage amplifies both profits and losses by the same multiple. At 10x leverage, a 5% gain becomes a 50% gain, but a 5% loss also becomes a 50% loss.
The Real Effect of Leverage
Return Amplification
With $10,000 margin opening a BTC long position, when BTC rises from $100,000 to $103,000 (+3%):
| Leverage | Position Size | Profit | ROE |
|---|---|---|---|
| 1x | $10,000 | $300 | 3% |
| 3x | $30,000 | $900 | 9% |
| 10x | $100,000 | $3,000 | 30% |
| 25x | $250,000 | $7,500 | 75% |
| 50x | $500,000 | $15,000 | 150% |
Distance to Liquidation
With the same $10,000 margin, approximate price movement to liquidation by leverage:
| Leverage | Price Move to Liquidation | BTC Reference ($100,000) |
|---|---|---|
| 2x | ~50% | ~$50,000 |
| 5x | ~20% | ~$80,000 |
| 10x | ~10% | ~$90,000 |
| 20x | ~5% | ~$95,000 |
| 50x | ~2% | ~$98,000 |
| 100x | ~1% | ~$99,000 |
Actual liquidation prices vary based on maintenance margin rates, fees, and funding. These numbers are approximate references.
At 50x leverage or higher, liquidation can occur within BTC's normal daily volatility (2-5%). High leverage has an extremely high probability of liquidation within a short time period.
Cross Margin in Detail
How It Works
In cross margin, your entire available balance in that margin account serves as collateral for the position.
Example:
- Account balance: $50,000
- Open $100,000 position at 10x leverage
- Initial margin: $10,000
- Remaining $40,000 automatically acts as buffer
In this case, even if the position moves against you, the additional $40,000 automatically supports the position, giving you much more room before liquidation.
Advantages
- Liquidation price is farther away, making you more resilient to temporary fluctuations
- Can share margin across multiple positions
- Not easily shaken by minor adverse movements
Disadvantages
- Can lose entire account balance on liquidation
- One position can consume margin from other positions
- Difficult to pre-limit maximum loss
Isolated Margin in Detail
How It Works
In isolated margin, only the margin allocated to the position is used for that position. The rest of your account balance remains unaffected.
Example:
- Account balance: $50,000
- Allocate $10,000 as isolated margin for a 10x leverage position
- Remaining $40,000 is completely protected
- Maximum loss on liquidation: $10,000
Advantages
- Maximum loss is limited to allocated margin
- Can manage risk independently across multiple positions
- Liquidation of one position doesn't affect others
Disadvantages
- Less room before liquidation
- May experience unnecessary liquidations from temporary fluctuations
- May need to manually add margin
Adding/Removing Margin
In isolated margin, you can add or remove margin while maintaining your position.
- Adding margin: Moves liquidation price further away. Increases tolerance for losses
- Removing margin: Brings liquidation price closer, but recovers some locked margin
Effective Leverage vs Set Leverage
Set Leverage
The leverage multiplier you select on the exchange. Setting 10x means you can open positions up to 10 times your margin.
Effective Leverage
The leverage you're actually using.
Effective Leverage = Position Size / Total Account Assets
Example:
- Account balance: $50,000
- Set leverage: 20x
- Actual position opened: $100,000
Set leverage is 20x, but effective leverage is $100,000 / $50,000 = 2x.
Effective leverage reflects your true risk level. A strategy of setting high leverage but keeping position size small gives you more room before liquidation while still benefiting from leverage effects.
Strategies by Leverage Level
Low Leverage (1-3x)
- Purpose: Slight efficiency improvement over spot, short hedging
- For: Long-term investors, hedging spot positions
- Liquidation risk: Very low
- Holding period: Days to weeks
Medium Leverage (5-10x)
- Purpose: Medium-term directional trading
- For: Experienced traders
- Liquidation risk: Moderate. Stop-loss essential
- Holding period: Hours to days
High Leverage (20x+)
- Purpose: Short-term momentum capture, scalping
- For: Professional traders
- Liquidation risk: High. Immediate stop-loss essential
- Holding period: Minutes to hours
Margin Management Principles
1. Keep Only a Portion of Assets in Margin Account
Don't put your entire portfolio in derivatives trading accounts. Allocating 10-30% of total assets to derivatives accounts is safer.
2. Avoid Excessive Concentration in Single Positions
Set 5-10% of margin account balance as maximum loss limit per position. Using isolated margin makes this rule easy to follow.
3. Add Margin Carefully
Adding margin when a position moves against you can delay liquidation, but may be throwing more money at a bad position. If your original analysis was wrong, cutting losses is better.
4. Consider Correlation Between Positions
BTC long + ETH long + SOL long may look like three independent positions, but if the overall market drops, all three lose simultaneously. Holding multiple highly correlated positions essentially adds up your risk.
Common Mistakes
"Recovery" Leverage
Increasing leverage after losses to quickly recover principal. Almost always leads to bigger losses. The correct response after losses is to reduce position size.
Ignoring Liquidation Price
"It won't drop that far" is extremely dangerous thinking in crypto markets. BTC can move 10-20% in a single day. Always check your liquidation price and assess whether that price is realistically achievable.
Ignoring Funding Rates
Higher leverage means larger position size, which means higher funding rate burden. With 0.01-0.1% funding every 8 hours, that's 0.03-0.3% daily, or 0.9-9% monthly. High-leverage long-term positions can be liquidated by funding costs alone.
Summary
Leverage is a double-edged sword that equally amplifies both profits and losses. Cross margin provides more room before liquidation but higher maximum losses, while isolated margin limits losses but makes liquidation easier. Effective leverage reflects true risk better than set leverage, and in most situations, lower leverage produces better results than higher leverage. The key to margin management is ensuring that a single loss doesn't jeopardize your entire account.
Next article: Mastering Funding Rates - The Barometer of Market Sentiment