How Leverage Works

 

How Leverage Works in Crypto Trading (And Why You Should Be Careful With It)

Leverage is one of those terms you hear a lot in crypto trading circles, and it sounds exciting — after all, who doesn’t want to turn a small investment into a bigger one? But while leverage can help you amplify your gains, it can just as easily magnify your losses. If you’re not sure how it works, or whether you should even be using it, this article will break it all down for you.

What Is Leverage?

At its core, leverage lets you trade with more money than you actually have. It’s like borrowing funds from the exchange to increase the size of your trade.

Let’s say you have $1,000 in your account. If you use 10x leverage, you can enter a trade worth $10,000. That means you’re putting down $1,000 of your own money (called “margin”) and borrowing the remaining $9,000.

This means that your potential profits and losses will be calculated based on the $10,000 position, not your $1,000, and you are responsible for all of the profits and losses that are incurred on this $10,000

A Quick Example

Imagine Bitcoin is trading at $30,000. You believe it’s going to go up, so you enter a long position with 10x leverage and $1,000 of your own money.

• If Bitcoin goes up 5%, your position is now worth $10,500. That’s a $500 profit — a 50% return on your initial $1,000.

• But if Bitcoin drops 5%, your position is worth $9,500. You’ve lost $500 — half your capital — just like that.

And if it drops further, your losses can quickly eat through your margin. Once it hits a certain point, the exchange will liquidate your position (i.e., close it automatically) to prevent further losses. This happens when the loss on your position reaches your total margin, so if your $10,000 position loses $1,000 in value, that means you have lost all of your $1,000 margin and the position will be closed automatically. This is why setting a proper stop loss and managing your risk is important.

Going Long vs. Going Short

Leverage works whether you’re going long (betting the price will go up) or short (betting the price will go down). In both cases, you’re still using borrowed money to make a bigger bet.

This can be useful if you’re confident in your analysis and want to maximize returns. But it also means you can be wrong in a bigger, faster, and more painful way.

Final Thoughts

Leverage can be a useful tool in crypto trading, but it’s not something to mess around with lightly. If you’re new to trading or still figuring out your strategy, it’s usually better to avoid leverage altogether until you’re more confident.

Trade smart. Stay informed. And always respect the power — and the risk — that comes with trading on leverage.

As always, thanks for reading, and feel free to reach out with any questions!