Leverage
Leverage uses borrowed funds to increase position size, amplifying both gains and losses.
Traders post collateral to open positions larger than their equity. Exchanges enforce maintenance margins and liquidate positions that breach risk limits.
"With 5x leverage, a 10% adverse move wipes out the initial margin, triggering liquidation if not managed."
"Cross margin shares collateral across positions; isolated margin ring-fences risk per position."
Leverage increases volatility of P&L, requires disciplined risk management, and can cascade in stressed markets due to forced liquidations.
"Stop-loss orders and conservative position sizing help contain tail risk."
"Funding rates on perpetual swaps influence the cost of holding a leveraged position over time."
Related Terms
Futures
→A derivatives contract to buy or sell an asset at a predetermined price at a future date; in crypto, perpetual futures (no expiry) are most common.
Funding Rate
→A periodic payment exchanged between longs and shorts on perpetual futures to keep contract prices anchored to spot.
Liquidation
→Liquidation is the forced closure of a leveraged position when collateral is insufficient to cover losses, protecting the exchange or lenders.
All terms and definitions may update as the Cryptionary improves.
