Leverage is one of the most tempting tools in crypto trading—and one of the fastest ways to blow up an account. It’s popular because it lets you control a larger position with a smaller amount of capital. But regulators and educators repeatedly warn that leverage amplifies both gains and losses. The U.S. CFTC puts it plainly: when you trade through leveraged accounts, you fund only a fraction of the underlying value, and that leverage can make even small price moves far more significant.
This guide explains leverage in crypto trading in plain English: what it is, how margin and liquidation work, how perpetual futures funding rates affect your P&L, and a practical checklist to reduce liquidation risk.
What is leverage in crypto trading?
Leverage means borrowing (or using a derivative structure) to increase your market exposure. If you use 10x leverage, a 1% move in the underlying asset becomes roughly a 10% move on your position (before fees and funding). That’s why leverage can feel like a shortcut—until price moves against you.
In practice, leverage is most commonly used in:
- Perpetual futures (perps)
- Margin trading (borrowing to buy/sell)
- Options (embedded leverage)
- Leveraged tokens/ETPs (packaged leverage with path-dependent risk)
Because leverage increases risk, the CFTC’s digital asset guidance highlights that firms offering leverage, margin, financing, or derivatives generally fall under additional regulatory expectations, and it encourages checking registrations.
Margin, collateral, and liquidation: the three concepts you must understand
1) Margin (your “skin in the game”)
Margin is the collateral you put up to open and maintain a leveraged position. Your exchange will require:
- Initial margin (to open the position)
- Maintenance margin (minimum margin to keep it open)
2) Liquidation (forced position closure)
If your losses push your margin below maintenance requirements, the exchange can liquidate your position to prevent the account from going negative. In crypto, liquidation can happen quickly because volatility is high and moves can be sharp.
A simple way to think about it:
- Higher leverage → liquidation price is closer to entry price
- Lower leverage → more “breathing room” before liquidation
Coinbase’s education materials echo this: using lower leverage is one of the most effective ways to reduce liquidation risk (e.g., 3x is less likely to liquidate than 10x).
3) Collateral type
Some platforms let you post collateral in:
- stablecoins (e.g., USDT/USDC)
- the underlying coin (e.g., BTC collateral for BTC perps)
Stablecoin collateral typically makes your margin value more predictable; coin collateral can add extra volatility to your risk because both your position and your collateral can drop at the same time.
Cross margin vs isolated margin
Most derivatives platforms offer two common margin modes:
Isolated margin
Only the margin assigned to that position is at risk.
- Pros: limits damage to one trade
- Cons: position may liquidate sooner unless you add margin manually
Cross margin
Your entire available margin balance supports the position.
- Pros: can reduce liquidation risk for a single position
- Cons: can wipe out more of your account if the trade goes bad
If you’re learning leverage, isolated margin is usually the safer training wheels because it helps you cap worst-case outcomes per trade.
Perpetual futures and funding rates (the “invisible” cost)
Perpetual futures don’t expire. To keep perp prices aligned with spot, exchanges use funding rates—periodic payments exchanged between longs and shorts.
Coinbase explains it clearly:
- When funding is positive, longs pay shorts (perp price above spot)
- When funding is negative, shorts pay longs (perp price below spot)
Why funding matters:
- Funding can quietly erode profits if you’re on the paying side for long periods. Coinbase explicitly warns that high funding rates can eat into returns over time.
- Funding can also signal crowding: extreme positive funding can imply too many longs; extreme negative funding can imply too many shorts.
Why leverage is extra dangerous in crypto
Crypto markets combine three risk multipliers:
- Higher volatility than most traditional assets
- 24/7 trading, meaning liquidations can happen while you sleep
- Thin liquidity pockets, where price can gap into liquidation clusters
Regulators also emphasize that crypto is high risk and people should be prepared to lose their money (the FCA frequently uses “high risk” warnings in its consumer-facing materials).
A practical leverage framework
Step 1: Pick a leverage cap you’ll never exceed
If you’re not a professional, a common “survival-first” approach is:
- 1x–3x for directional trades
- higher leverage only for very short-term setups with strict risk limits
(That’s not a rule—just a reality check: most liquidation stories start with 20x+.)
Step 2: Risk per trade (the rule that matters more than leverage)
Decide the maximum you can lose on one trade, e.g.:
- 0.5%–2% of account equity per trade
Then set your position size and stop-loss so the loss is tolerable even if you’re wrong.
Step 3: Always know your liquidation price before you click “open”
If the liquidation price is “close enough to get hit by normal noise,” lower leverage or add margin. Don’t rely on hope.
Step 4: Use stops, but don’t worship them
Stops help, but in fast markets you can still slip. Use leverage low enough that a sudden wick doesn’t instantly liquidate you.
Step 5: Respect funding and fees
If you’re holding perps for days/weeks, funding can become a major part of your result. Coinbase’s perp guides specifically highlight funding as a common pitfall.
Step 6: Avoid “cross margin + revenge trading”
Cross margin is where one bad trade can start eating everything. Revenge trading is how people turn “one bad trade” into “account blown.”
Common leverage mistakes
- Using maximum leverage because it’s available
Availability is not a recommendation. - Ignoring liquidation mechanics
Know the liquidation price and maintenance margin rules. - Holding a highly funded perp too long
Funding can silently tax you. - Overconfidence during high volatility
If volatility spikes, reduce leverage. (This is one of the simplest ways to survive.) - Treating leverage like a long-term investment tool
Leverage is primarily a trading tool. Long-term leverage amplifies the chance of getting wiped out by one extreme move.
Quick checklist: “Should I use leverage on this trade?”
If you can’t answer “yes” to all of these, consider going spot (or using lower size):
- I know my entry, invalidation, and target
- I know my liquidation price and it’s far enough away
- I’m risking a fixed % of my account (not “whatever happens”)
- I’ve checked funding rate and understand the cost
- I’m using isolated margin (or I understand cross margin risk)
- I’m okay being wrong without changing my life
Final thoughts
Leverage in crypto trading isn’t “good” or “bad”—it’s powerful. The problem is that crypto volatility turns power into fragility. The CFTC’s core warning is that leverage amplifies risk because you’re only funding a fraction of the underlying position. The most practical way to use leverage safely is to treat it as a precision tool: small leverage, strict risk limits, and full awareness of liquidation and funding mechanics.