How leverage helps increase profits in crypto trading

The essence of leverage in two words

Leverage is a financial instrument that allows a trader to open positions larger than their own capital. With this mechanism, you can start trading with a small initial deposit, using borrowed funds for larger trades.

In practice, it looks like this: with $100 in your account, you can open a position worth $1000 thanks to 10x leverage. On some platforms, the leverage ratio can reach 1:100, which means you can increase the position size by 100 times.

Where Leverage is Used

In cryptocurrency trading, leverage is used in two main ways:

Margin trading - you borrow crypto assets or stablecoins directly for trading on the spot market.

Derivatives Trading - you work with perpetual contracts where leverage is built into the mechanics of the contract. In this case, you do not take the assets yourself but use the principle of mutual settlement of long and short positions.

How the Margin System Works

To start margin trading, you first need to deposit funds into your trading account. This money serves as collateral or security.

Initial margin

Initial Margin is the minimum amount you must deposit to open a position. Its size depends on the leverage ratio chosen.

Suppose you want to open a position on $1000 in Bitcoin (BTC) with a leverage of 10x:

• Required collateral = $1000 ÷ 10 = $100

If you choose a leverage of 20x:

• Required collateral = $1000 ÷ 20 = $50

It is important to remember: high leverage requires less collateral but significantly increases the risk of liquidation.

Supporting Margin

After opening a position, you need to maintain a minimum level of funds in the account — this is the maintenance margin. If your losses grow and the balance falls below this threshold, the exchange will send you a margin call — a request to top up your account.

The difference is simple:

• Initial Margin — the condition for opening a position
• Maintenance Margin is a condition for keeping an open position.

Practical examples of leveraged trading

Scenario for growth ( long position )

Let's assume:

• You are opening a long position on BTC worth $10,000
• Use 10x leverage ( collateral $1,000)
• The current price of BTC is $40,000

If the price has increased by 20% to $48,000:

• Your position has increased by $2,000
• Profit: $2,000 (minus platform fees)
• This is 20 times more than the profit $100 from a regular purchase of $1,000 worth of BTC

But if the price dropped by 20% to $32,000:

• Your position has lost $2,000
• The position is being liquidated as your collateral was only $1,000.
• Even a drop of just 10% can lead to liquidation depending on the platform's parameters.

Scenario on decline (short position)

You are taking 0.25 BTC at a price of $40,000 ( totaling $10,000) and selling with 10x leverage ( collateral $1,000).

If the price dropped by 20% to $32,000:

• You are buying 0.25 BTC for $8,000
• Profit: $2,000 (minus fees)

If the price has increased by 20% to $48,000:

• You need an additional $2,000 to buy 0.25 BTC for $12,000
• If the balance falls below $1,000, the position is liquidated.

Why Leverage is Necessary

Leverage allows traders:

1. Increase potential profit — a small price shift brings significant returns.
2. Optimize capital — instead of freezing a large amount in one position, you can maintain a 4x leverage and use the freed-up money for staking, other positions, or providing liquidity in DeFi.

However, these advantages are inseparable from the risks.

Risk Management: How Not to Lose Everything

The main rule: less leverage — less risk

High leverage requires precision. A price movement of even 1% with 100x leverage can wipe out the entire collateral. That’s why many platforms limit the maximum leverage for beginners.

Use protective orders

Stop-loss will automatically close a losing position when a certain price is reached. It helps to stop losses if the market moves against you.

Take profit will lock in profits when they reach the target level.

Monitor the margin yourself

Do not rely solely on margin calls. Continuously monitor the status of your account and the level of maintenance margin. This is especially important in the volatile crypto market.

Trade only with free funds

Never borrow money for margin trading. Only use funds whose loss will not affect your life.

Key Takeaways on Leverage

Leverage is a powerful tool that can multiply both profits and losses. In the volatility of the cryptocurrency market, high leverage often leads to rapid liquidation of positions.

Before using leverage:

• ✓ Fully understand the mechanics of the platform
• ✓ Practice on a demo account or with minimal leverage
• ✓ Set a stop-loss for each position
• ✓ Start with low leverage (2x-5x) and only then move higher
• ✓ Remember: cryptocurrencies are volatile, the risk of capital loss is very high

Margin trading requires experience, discipline, and constant risk management. It is not suitable for beginners without proper preparation.