06.03.2025
Leverage trading can be a powerful tool for increasing returns. However, it can be quite risky if you don't know the rules. So it's not recommended for beginners.
Warren Buffet once said:
“When you combine ignorance and leverage, you get some pretty interesting results.”
This is 100% correct for this type of trading as it can be a disaster in the wrong hands and an El Dorado in the hands of a professional.
What is leverage?
Leverage means borrowing funds to make a larger investment. Suppose you want to trade a larger position but don't have enough funds. That's when leverage trading comes in handy. It can help you gain exposure to larger additional funds and multiply your profits, but it also increases the risks because if your investment doesn't work out, your debt will also multiply.
To date, platforms offer different types of leverage, starting from 2x leverage, 5x leverage or even 100x leverage. You can choose the type of leverage you want to use according to your trading goals and risk tolerance.
The history of leverage trading
The first use of the term 'leverage' dates back to 1933. So, despite popular belief, leveraged trading has been around for a long time.
In the past, however, extremely high leverage ratios were encouraged because the trading market was unregulated. That's why many traders faced a margin call - a notification that their balance was well below the amount needed to keep the entire position open. That's why, over time, leverage trading has become increasingly regulated to reduce the risks.
How does leverage trading work?
Profits and losses in leveraged trading are based on the investor's total capital to gain exposure (investor's potential risk).
When trading cryptocurrencies, you can take either a short position (when you think the value of an asset will go down) or a long position (when you think the value of an asset will go up).
A long position is when you own an asset that you expect to rise in value over time, so that you can sell it and make a profit.
A short position is when you make money using borrowed assets/capital to gain exposure or collateral. It can be a successful scenario if the price falls over time. A short scenario tends to be more risky because if the value increases, your loss will be much greater than the amount you borrowed.
One of the core concepts of leverage trading is the leverage ratio: the ratio of margin to leverage. For example, if the leverage ratio is 1:20, you can enter a $20 position with $1 of margin.
Let's look at another example.
What does 1 to 500 leverage mean?
A 1 to 500 leverage ratio means that for every $1 of your funds, you can control $500 in open positions.
What does 20 times leverage mean in trading?
For example, you have $3000 and you want to use 20x leverage to open an ETH trade. In leveraged trading this means that you can control a position worth $60,000. However, you should be aware that leverage increases both profits and losses. If the price of ETH moves by 1%, your profit or loss will be 20% due to 20 times leverage.
Profit scenario (ETH as underlying asset):
If ETH rises 1% to $2176, the profit is $21 (1% x $2176), or a 10% gain on an initial investment of $3,000.
Loss scenario (ETH as underlying asset):
If ETH falls by 1% to $2154.24, the loss is $21 (1% of $10,000), or a 10% loss on an initial investment of $3,000.
Leverage trading financial instruments
Leverage trading employs various strategies that describe the management of collateral and the allocation of risk across trading pairs, as well as position sizes to optimise these strategies.
Isolated margin
Isolated margin limits risk to the collateral allocated to a single trade, preventing losses from affecting the rest of the account balance. This makes it a popular choice for trading volatile assets or experimenting with new strategies while limiting risk.
Isolated margin is ideal for beginners and those who have many positions open at any one time. There's a high risk of liquidation, so it requires constant monitoring and manual adjustments.
Cross margin
Cross margin trading means that the entire account balance is used as collateral for all open positions, so that profits in one position can cover losses in others, balancing the profit/loss ratio. So there's minimal risk of immediate liquidation. However, if the market price moves significantly, your entire account may be affected. Cross margin saves you time as you don't have to monitor each open trade separately. It also maximizes the efficiency of your account funds. However, the risk of losing your entire account balance is higher and requires proper monitoring and trading skills.
Contracts for Differences (CFDs)
Contracts for Differences (CFDs) allow you to take a market view on price movements without literally owning an asset. With CFDs, a broker and trader make an agreement to exchange the difference in the value of a cryptocurrency from the opening position to the closing position, creating a speculative position.
Margin trading
This is a type of leverage trading where you borrow funds directly from the broker and use them to open spot positions. There's usually a fixed interest rate for this type of trading, set by the borrowers. If a trader is happy with the interest rate, then a borrower and a trader make a deal.
If you make a profit, you'll have to return both the amount you borrowed and a fixed interest rate to your borrower. Note that you will need to register a special margin account for this type of order. There may also be forced liquidations if the margin is not maintained.
Crypto futures
Crypto futures contracts allow traders to go long or short on cryptocurrencies without owning the underlying asset. Traders post collateral as margin, allowing them to open leveraged positions worth many times their margin. Profits and losses are settled daily through a process called mark-to-market, reflecting price fluctuations. However, like other leveraged trades, futures carry the risk of forced liquidation if losses exceed the margin.
Crypto options
Crypto options are financial instruments that allow any buyer to buy or sell any crypto asset at a fixed price or before the expiration date. The seller fulfils an option when the buyer exercises an option. With crypto options, the upfront premium is small compared to the position, allowing for great leverage.
What leverage is good for $100?
To manage all possible risks, it is better to use a low ratio like 1:10 or 1:20 if you only have $100 to bet. A high leverage/small amount of money combination may be too risky.
Pros of trading with leverage
Greater potential returns and buying power. The trader's buying power increases considerably when trading with leverage. By allowing yourself to take a position much larger than your capital, you can achieve higher returns, especially in volatile markets.
Access to a more expensive asset class. Thanks to the large financial instruments and higher positions, traders gain access to more expensive asset classes that they wouldn't be able to hold without leverage trading.
Flexibility. Leverage offers many more options and strategies. You can alternate between long and short positions, testing different strategies to understand which works better for you. It's perfect for short-term traders who usually make their profits by reacting quickly to market volatility.
Short positions. Leverage trading is the only way to take advantage of falling prices. For example, if the price of BTC falls due to the cancellation of the US Federal Crypto Reserve or other reasons, you can always spread the potential loss to other positions.
Cons of trading with leverage
Liquidation possibility. This is the biggest fear of all leverage traders. If the market moves in the opposite direction to your position, your collateral will soon be insufficient to cover potential losses. In this case, the platform will liquidate your positions.
Limited choice of trading pairs. Not all platforms allow you to trade with leverage. Some restrict this type of trading for popular pairs such as USDT/ETH. This limits diversification.
Higher fees. When trading with leverage, you'll pay fees for borrowing funds, including interest and trading fees. These fees can make highly leveraged trades unprofitable.
Complex strategy. Trading with leverage requires a lot of specialist knowledge from the trader. You'll need to learn a lot of terms and strategies and practice a lot before you open your first position. So if you're looking for quick profits, this may not be your choice.
Best cryptocurrency exchanges for leverage trading in 2025
In 2025, there are many virtual currency exchanges offering leveraged trading services. You can choose one or the other depending on your investment goals, budget and risk tolerance. Choose wisely and do your research before making a final decision.
CEX.IO
CEX.IO has proven to be one of the most reliable cryptocurrency exchanges in the world. It has 15 million users worldwide and 40 licences and registrations globally. Security, transparency and a wide range of trading options make this platform a perfect choice for both beginners and experienced traders.
CEX.IO offers up to 10x leverage with flexible multi-collateral options and competitive hourly rollover fees. CEX.IO has its own card, instant buy/sell services and an easy-to-use mobile app. The platform operates 150 cryptocurrencies across 300 markets and 40 blockchains.
Binance
Binance is the world's leading exchange platform with $76 billion in daily trading volume and over 90 million users worldwide. It provides access to over 350 listed cryptocurrencies and thousands of trading pairs.
Binance has grown into the largest crypto ecosystem, with many products and innovations including Binance Exchange, Labs, Launchpad, Info, Academy, Research, Trust Wallet, Charity, NFT and more.
Traders are allowed to borrow funds and use leverage on Binance, allowing them to trade crypto assets with up to 10x leverage. Traders are free to use derivative products such as Binance Futures, which can be settled in USDT, BUSD or other cryptocurrencies.
Bitpanda
Bitpanda is an easy-to-use trading platform with over 400 team members and over 3.5 million users.
It's a one-stop platform that allows you to trade cryptocurrencies, stocks, ETFs and precious metals all in one place. It has an intuitive interface and advanced options such as API integrations.
Bitpanda has a high level of security, offering two-factor authentication (2FA) and secure asset storage. It offers over 500 cryptocurrencies and is available on iOS, Android and web.
Bitpanda maintains over 30 long and short leverage positions and offers innovative tools such as re-leveraging to keep the target leverage ratio on your behalf. Bitpanda also has one of the lowest fees on the market: the buy fee for leveraged positions is 0%, the exit fee is 1%. It is charged when you close leveraged positions.
What is the difference between trading with leverage on CEX and DEX?
In traditional CEX margin trading, you need to transfer your funds to the exchange's wallet before you start trading. The exchange acts as the custodian, holding your funds on the server. Thus, you are controlled by the centralized system and people you have never seen. You no longer manage your funds.
In addition, complex know-your-customer (KYC) requirements and high fees have deterred many users.
On decentralized exchanges, the scheme is different. Here you are free from centralized intervention. A broker in DeFi becomes one of the autonomous money markets. And the central role is played by His Majesty, the smart contract. As far as the security factor is concerned, it is quite doubtful. On the one hand, the security of DEX is provided by a group of validators, and many human errors can occur. Still, you're free to keep your money safe and not transfer it to the platform. But traditional DEX is notorious for sandwich attacks and slippage risks.
CEX is more vulnerable to hacks, data manipulation and cyber attacks. So whichever you choose, you do so at your own risk.
Conclusion
Crypto leverage trading can become a perfect tool to optimize and increase your results if you take it seriously. It opens up a whole new world of trading strategies and options, making your trading strategy flexible and adaptable to market changes.
However, you should consider all the possible risks associated with this type of trading, including possible liquidations and higher fees, in order to optimise positions for the best possible potential returns.