All about leverage in crypto trading

September 20, 2023
Last Update December 07, 2023

Leverage trading can be confusing for those who are just starting their trading activities. That’s why here, we will try to explain how it works in an easy way.

Leverage is using borrowed funds to trade. It enables you to trade with more money than you have available.

For example, you want to open a position worth $1,000 but have only $100. Using a 10x leverage would provide you with the required sum. You can borrow this sum and open a position with the borrowed funds.

How leverage works

Nobody lends money without any guarantees. That’s why before you borrow funds and start trading leverage, you need to deposit some funds into your trading account first. These funds are known as collateral. They will serve as a guarantee that you will repay your debt with interest.

The collateral sum depends on the leverage you are going to use and the margin (the total value of the position you are going to open). 

For example, if you want to invest $1,000 with a 10x leverage, your margin is 1/10 of $1,000, which is $100. It means that you have to have $100 in your account that will serve as collateral. For a 20x leverage, the margin is half of the previously calculated value (100 / 2 = $50). So, in this case, you need to have only $50 as collateral.

Note please that the higher the leverage, the higher the risk of liquidation.

You can use leverage to open long and short positions. If you expect the asset pice to grow, open a long position. If you expect it to drop, open a short position. It sounds like spot trading, but leveraging means that you can trade with more money than you actually have, and thus, profits may be significantly higher (but losses as well).