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Learn how leverage works in crypto trading, how liquidations happen, the real risks of leveraged trading, and how to use leverage responsibly if you choose to in 2026.
What is Leverage in Crypto? Amplifying Exposure With Borrowed Capital
Leverage in crypto trading means using borrowed capital to increase the size of your position beyond what your own funds could support. If you have $1,000 and trade with 10x leverage, you control a $10,000 position. Every one percent price move creates a ten percent gain or loss on your initial $1,000.
Leverage is available on both centralized exchanges like Binance, Bybit, and OKX, and decentralized platforms like GMX, dYdX, and Hyperliquid. Leverage ranging from 2x to 125x is commonly offered, with perpetual futures being the primary instrument through which crypto leverage is accessed.
The appeal of leverage is obvious: it magnifies potential gains without requiring proportionally more capital. The reality is equally obvious once experienced: it magnifies losses with the same efficiency, and liquidation can eliminate your entire position in a single adverse price move.
How Liquidations Work: When Losses Exceed Margin
Liquidation is the automatic closure of a leveraged position when losses have consumed your margin to the point where the exchange can no longer guarantee the debt will be covered.
When you open a leveraged position, you have an initial margin and a maintenance margin threshold. The maintenance margin is the minimum amount your account must hold. When losses bring your account below this threshold, the exchange liquidates your position, selling your collateral to cover the debt and returning whatever remains, which may be very little.
The liquidation price is calculable in advance. At 10x leverage, you are liquidated if the price moves approximately 8 to 10 percent against you (accounting for fees and maintenance margin). At 20x leverage, a four to five percent adverse move is sufficient to trigger liquidation. At 50x leverage, around two percent.
In volatile crypto markets, these are not edge-case scenarios. They are normal daily price movements.
The Statistics: Why Most Leveraged Traders Lose
The data on retail leveraged trading outcomes is sobering and worth taking seriously before opening your first leveraged position.
Exchanges and financial regulators have published data consistently showing that the large majority of retail traders using leverage lose money over time. The combination of liquidation risk, funding costs on perpetuals, trading fees, and the natural difficulty of consistently predicting short-term price direction creates a structural headwind that price prediction alone struggles to overcome.
Crypto specifically compounds these challenges. Prices can gap significantly in short time windows due to news events, large liquidation cascades, or whale trading activity. Markets trade 24 hours a day, meaning adverse moves can occur while you are asleep. And the volatile nature of crypto that makes it seem like an opportunity to profit quickly through leverage is the same volatility that eliminates leveraged positions.
This does not mean leverage cannot be used profitably. Sophisticated traders with disciplined risk management do use it successfully. But it requires more than price prediction ability.
Risk Management for Leveraged Trading
If you choose to trade with leverage, disciplined risk management is not optional. It is what separates traders who last from those who blow up.
Position sizing is the foundational discipline. Never risk more than one to two percent of your total trading capital on any single leveraged trade. This means that even a string of consecutive losses leaves enough capital to continue. A ten percent position at 10x leverage with a ten percent adverse move wipes out ten percent of your capital. At two percent position sizing, the same scenario costs 0.2 percent.
Always set a stop-loss before entering any leveraged position. Know your maximum acceptable loss and enforce it automatically rather than hoping the position recovers.
Be aware of funding rates and their cumulative cost on positions held for days or weeks. A position with a two percent weekly funding cost in an unfavorable direction must generate over two percent in positive price movement just to break even on the funding alone.
Responsible Leverage: How to Approach It If You Choose To
For those who choose to use leverage after understanding the risks, several principles help manage it responsibly.
Use low leverage. The high leverage tiers offered by exchanges (50x, 100x) are designed to attract traders, not to be used as standard practice. Two to five times leverage is meaningful amplification while allowing substantially more room for adverse moves before liquidation.
Separate your trading capital from your long-term holdings. Never leverage assets you plan to hold long-term and cannot afford to lose. Have a defined allocation for leveraged trading that you treat as genuinely at risk.
Track your performance honestly over a significant number of trades, at least fifty to one hundred. If your risk-adjusted returns are not outperforming simply holding the underlying asset in spot, leverage is not adding value to your strategy.
Platform risk matters. Ensure the platform you trade on is reputable, well-capitalized, and has a history of fair liquidations. Some less reputable exchanges have been known to manipulate prices or use internal order flow to trigger customer liquidations.
Leverage: A Sharp Tool for Those Who Respect It
Leverage is not inherently good or bad in crypto trading. It is a tool that amplifies whatever you are already doing, including your mistakes.
For long-term investors, leverage has no appropriate role in core holdings. The liquidation risk and funding costs create negative expected value for any position you intend to hold through volatility.
For active traders who choose to use it, the disciplines of position sizing, stop-losses, low leverage ratios, and honest performance tracking are what determine whether it becomes a sustainable edge or an efficient way to lose capital. Approach it with genuine respect for the mathematics of liquidation and the realities of what most retail leveraged traders experience.
This information, including any opinions and analyses, is for educational purposes only and does not constitute financial advice or recommendation. You should always conduct your own research before making any investment decisions and are solely responsible for your actions and investment decisions.
The services of Freedx are not directed at, or intended for use by residents of the United States, Canada, and the United Arab Emirates, nor by any person in any jurisdiction where such use would be contrary to local laws or regulations.
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