Leverage and liquidation
Lesson 26 of 39 in the course “Crypto”. Free, with animations and a quiz.
Leverage: a trade bigger than your cash
Leverage means the exchange adds its money to yours, so the trade gets bigger. Your own money in the trade is called collateral, or margin. The position is the full size of the trade. For example: $100 margin at 10x leverage gives a position of $100 × 10 = $1,000. Profit and loss are counted on $1,000, not on your $100. Sounds great, but it cuts both ways.
Leverage multiplies gains and losses
For example: $100 margin, 10x leverage, a $1,000 position. Price moves 1%: that is ±$10, because 1% of $1,000 = $10. For your $100 that is already ±10%. Price up 1%: you are +10%. Price down 1%: you are −10%. Leverage does not make you smarter than the market. It just makes every move 10 times more painful or more pleasant.
Liquidation
Liquidation is when the exchange closes your trade by itself because the loss has almost eaten your margin. That is how it gets its money back. At 10x, a 1% price move against you takes 10% of your margin: 1% × 10 = 10%. So a move of about 10% against you burns the whole margin. In practice liquidation comes a bit earlier, because the exchange keeps a small buffer and charges fees.
Working out the liquidation price
For example: a long, meaning a bet that price rises, on BTC from $100,000. Margin $1,000, leverage 10x, position $10,000. Liquidation lands near $90,500: that is −9.5%, not exactly −10%, because of the exchange buffer. At 25x it is about −3.5% away, at 50x about −1.5%. The exchange shows the exact price before you open the trade. Always check it.
The beginner rule
The higher the leverage, the closer the liquidation. At 10x it is about 10% away, at 50x only about 2%: 100% ÷ 50 = 2%. In crypto that is an ordinary daily swing. So a beginner is better off with no leverage or a small one, 2–3x. That is a rule of thumb, not a law. And risk only a small slice of your deposit per trade; a common rule is about 1%.
Check yourself
- Margin $100, leverage 10x. What is the position size?
Correct answer: $1,000. Leverage multiplies the margin: $100 × 10 = $1,000. The trap: $110 is what you get by adding instead of multiplying. - At 10x, price moves 10% against you. What happens to the position?
Correct answer: Margin is gone, it gets liquidated. 10% × 10 = 100% of the margin. The exchange closes the position, likely a bit earlier. Losing 10% of margin would take only a 1% move. - What is safer for a beginner?
Correct answer: No leverage or 2–3x. Low leverage leaves a wide gap before liquidation. At 50x, an ordinary 2% swing can trigger it.