What Is Leverage in Crypto? A Beginner's Guide to Trading With Leverage
- rachelbeautybar
- Aug 4
- 3 min read
Leverage in crypto trading is a powerful tool that allows traders to control a larger position with a smaller amount of capital. For beginners, it can be the gateway to higher profits, but it also carries significant risk. In this guide, we’ll explore what leverage is, how it works in the crypto market, and how you can use it wisely.
What Is Leverage in Crypto?
Leverage refers to borrowing funds to increase your trading position beyond what would be available from your own cash balance. It’s similar to putting down a small deposit (margin) to gain access to a much larger trading position.
Example:
If Bitcoin is trading at $33,000 and you want to buy 1 BTC, you’d need $33,000 in a spot market.
But with 10x leverage, you only need $3,300 to open that position.
The remaining $29,700 is effectively borrowed from the exchange. Your profit and loss will be based on the full $33,000 exposure—not just your initial margin.
Leverage Ratio Explained
Leverage is typically offered in ratios, such as:
1:5, 1:10, 1:20, up to 1:100 or more.
Most exchanges like Binance, BingX, or OKX allow customizable leverage settings depending on the trader’s strategy and risk appetite.
A higher leverage ratio increases both potential gains and potential losses.
Where Is Leverage Used in Crypto?
Leverage is widely used in crypto derivatives trading, especially in:
Margin trading (spot market with borrowed funds)
Futures contracts (perpetual or time-limited contracts)
Examples:
Binance Futures offers leverage up to 125x for BTC contracts.
BingX allows up to 150x on some BTC pairs.
Pros of Using Leverage
1. Amplify Profit From Small Capital
Leverage allows traders with limited capital to access larger positions and potential gains.
Example: With $500 and 10x leverage, you can control $5,000 worth of crypto. A 10% price movement could double your capital.
2. Lower Capital Requirement
Instead of risking your entire portfolio, you can use a small portion of it to access larger trades.
3. Short Selling
Leverage enables shorting—profiting from falling markets.
Example: During March 2020, BTC dropped from $10,000 to $3,500. Traders using leverage to short BTC made substantial profits.
Cons of Using Leverage
1. High Risk of Loss
Leverage magnifies losses just as much as gains. A 10% drop in price with 10x leverage could wipe out your position entirely.
Example:
Long BTC with $500 at $30,000 with 10x leverage.
BTC drops 10% to $27,000 => entire $500 liquidated.
2. You Don’t Own the Asset
Unlike spot trading, leveraged trades do not make you the owner of the underlying crypto. You won’t receive airdrops or staking benefits.
3. Extra Fees and Liquidation Risk
Leverage trading comes with additional costs:
Funding fees (based on market bias: long vs. short)
Overnight fees (if position is held overnight)
Liquidation risk if price moves against you too much.
How to Manage Risk When Using Leverage
1. Always Set a Stop-Loss
Define a clear Stop-Loss (SL) before entering a trade to limit potential losses. Avoid wide SL that exposes your capital unnecessarily.
2. Define Take-Profit (TP) Targets
Be realistic with profit targets. Don’t let greed erase gains. A proper risk-reward ratio (e.g., 1:2) keeps your strategy consistent.
3. Create a Backup Fund
Not every trade will be a win. Keep a reserve account for losses. Don’t go all-in on a single trade.
4. Use Lower Leverage for Volatile Assets
If you're trading highly volatile tokens, consider reducing leverage or increasing margin.
What Leverage Level Should You Use?
Choosing the right leverage depends on:
Risk tolerance
Account size
Trade setup
Tips:
New traders: Stick to 1x–5x leverage until confident.
If using 10x–20x leverage, keep position sizes smaller.
Avoid 50x–100x unless scalping with strict SL.
Alternative Approach: If you believe in a token’s long-term value, consider spot trading instead of leverage. This avoids liquidation and reduces emotional trading.
Conclusion
Leverage in crypto trading is a double-edged sword. While it can maximize your profits with minimal capital, it can also lead to significant losses if misused. By understanding how leverage works and applying solid risk management practices—such as using stop-loss orders, realistic profit targets, and proper position sizing—you can trade smarter and safer.
Repeat: Leverage in crypto can be a game-changer when used responsibly.
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