Using borrowed funds to increase the potential return of an investment.
Leverage refers to using borrowed capital to increase the size of a trading position. By amplifying exposure, leverage can significantly boost potential profits — but it also increases the risk of losses and liquidation.
Leverage is widely used in crypto futures, margin trading, and perpetual contracts.
How Leverage Works
If a trader uses 5× leverage, they control a position five times larger than their actual capital.
Example: $1,000 of capital with 5× leverage → $5,000 position size
Small price movements are magnified:
2% move in the underlying asset = 10% gain/loss on the leveraged position
Benefits of Leverage
Increases capital efficiency
Enables hedging with smaller capital
Allows traders to amplify directional strategies
Useful for short-term and high-frequency trading
Risks of Leverage
Amplified losses
High liquidation risk during volatility
Funding rate costs (on perpetual futures)
Requires strict risk management
Low timeframe swings can quickly wipe out leveraged positions.
Summary
Leverage uses borrowed capital to increase trading exposure. It can boost profits but introduces significant liquidation risk in volatile crypto markets.
