Leverage
In simple terms
Borrowing money to make a bigger investment than you could afford with just your own cash. It's like using a loan to buy more of something—if the price goes up, you make more profit, but if it goes down, you lose more too.
Definition
Using borrowed funds to increase position size. Gains and losses are magnified.
In depth
A trading strategy where a user borrows funds from an exchange or lending protocol to increase their position size beyond their account balance. The borrowed amount is typically collateralized by the user's existing assets, and leverage ratios (such as 2:1, 5:1, or 10:1) determine how much can be borrowed relative to collateral. Both profits and losses are multiplied by the leverage factor; a 10% price move on a 5:1 leveraged position results in a 50% gain or loss. Liquidation mechanisms automatically close positions if collateral falls below maintenance thresholds, protecting the lender from negative equity.
How does Leverage work?
A trader deposits collateral with a platform, which then allows a position larger than that deposit — the multiple between the two is the leverage ratio. The exchange tracks the full position value while the trader supplies only a fraction of it. Profit and loss accrue on the whole position size rather than on the deposit, so a small percentage move in price becomes a much larger percentage move in the trader's equity. The exchange monitors that equity continuously, and if it falls below a required minimum the position is closed automatically.
An example
Someone posts $1,000 as collateral and opens a 5x long position worth $5,000, using illustrative figures. A 10% price rise takes the position to $5,500 — a $500 gain, or 50% of their collateral. A 10% fall works identically in reverse: the position drops to $4,500, a $500 loss, removing half the collateral. A 20% fall against the position would erase all of it.
Figures are illustrative only.
What beginners get wrong
- Leverage multiplies losses exactly as it multiplies gains, so a 20x position is wiped out by roughly a 5% move against it.
- Fees and funding costs are charged on the full position size, meaning a small deposit at high leverage accrues charges quickly.
- Sizing a position by what the platform permits, rather than by what can be lost entirely, is a common and costly habit.
- Access to leveraged crypto products is restricted or unavailable for retail traders in some jurisdictions, and those rules change over time.
Related terms
Part of
How does crypto trading and market structure work? — the subject page for trading and market structure, with all 27 of its definitions in one place.
Educational only — not financial advice.