The smart guide to leveraged crypto trading

What is leverage, and why use it in crypto?

Let’s start with the basics. Leverage means using borrowed funds to open a larger position than you could with your own funds alone. It’s expressed as a ratio – like 2x, 5x or 10x – and tells you how much bigger your trade becomes thanks to borrowing.

For example, with 5x leverage, a €200 investment lets you open a €1,000 position. If the price goes up by 10%, you make a €100 profit. But if the price drops by 10%, you lose €100,  which is half your original investment. 

This example does yet not include fees which reduce your gains and amplify losses.

So why do traders use leverage? Because it offers flexibility:

• You can trade more with less capital

• You can profit from small price moves

• You can go long 

But this flexibility comes with risks. Leverage doesn’t just increase your exposure – it also increases your responsibility and potential losses. That’s why it’s crucial to understand the different types of leveraged trading before using them.

What types of leveraged crypto trading are there?

In the crypto space, you’ve got several ways to use leverage. Each comes with different mechanics, risk levels and user responsibilities. 

Here are the four main types of leveraged products you’ll find:

• Margin trading: You borrow funds to increase your trade size. You must control your trade and must manage your margin level to avoid liquidation.

• Leveraged tokens: These tokens give you exposure to a leveraged position without needing to manage margin or worry about liquidation. Unlike other leveraged products, they come with less exposure, making them a more accessible option for managing risk.

• Perpetual contracts: Derivatives that let you trade with leverage without expiry. You pay (or receive) funding fees to hold positions.

• Futures: Contracts that agree on a future price, settled at a later date. Like perpetuals, they can be highly leveraged and are common among advanced traders.

Each of these products/tools works differently, and each fits different strategies. Let’s dive deeper into the first, and most hands-on, form: margin trading.

1. Margin trading

Margin trading is one of the most direct and flexible ways to trade with leverage. It allows you to borrow capital from a platform or liquidity provider to increase your trade size. You remain in control of the position – from choosing when to enter and exit, to managing risk through market orders. At the same time margin trading puts you at risk losing your entire investment.

Here’s how it works:

Let’s say you want to open a long position worth € 1,000 in Bitcoin (BTC), but you only have € 200. With 5x leverage, you contribute € 200 of your own funds and borrow the remaining € 800 from the broker or exchange you trade on. This requires you to provide collateral to secure the borrowed amount. 

Keep in mind that fees can apply when using margin trading. For educational purposes only, the following example uses Bitpanda-specific fee assumptions, which may differ from those charged by other providers.

At a daily rate of 0.15% on the full position, this would result in fees of €1.50 per day. Over five days, that adds up to €7.50 — almost 4% of the margin — even if the market price remains unchanged. If the underlying asset were to decline by 10%, this would result in a €100 loss on the position, in addition to the accumulated fees. If the position were liquidated, an additional liquidation fee could also be deducted from the remaining funds.

Fee structures, rates, and liquidation costs vary by provider and may change over time.

This is the leverage effect in action: both gains and losses are magnified. The higher the leverage, the smaller the price move needed to impact your capital.

Margin trading is popular because it gives traders more flexibility and control. You can use it to:

• Amplify small market movements to generate higher returns

• Go short and profit when prices fall, not just rise

• Hedge a long-term position with a short-term trade

• Free up capital for other investments

But margin trading requires active management. You need to monitor your margin level constantly. If the value of your position drops too far, your position may be liquidated. That means the platform will automatically close your trade by liquidating your assets to limit further losses, and you could lose your entire investment.

For more details on how different types of margin trading work, check out our margin trading article.

Margin levels, thresholds and liquidation prices

When trading with leverage, it's not just the asset price you need to monitor – your margin level is just as important. It reflects the ratio between your own funds (equity) and the borrowed amount used to open a position. This level helps determine how close your leverage position is to being at risk of being liquidated.

As the value of your crypto assets forming part of the leverage position drops due to either market losses or accumulating fees, your margin level falls. If it drops below a specific threshold, called the maintenance margin,  your leverage position becomes vulnerable. The platform may trigger a margin call, asking you to top up your funds and provide additional collateral or to repay the borrowed funds by closing your leverage position. If you don’t react in time, or the price continues to move against you and further fees accumulate, this can result in the margin level falling below the minimum margin level (this is also referred to as Liquidation Threshold) and your position can be liquidated to prevent deeper losses.

What influences the liquidation price?

The liquidation price, the price point at which your position is automatically closed, isn’t fixed. It shifts based on:

• Leverage: Higher leverage increases the risk and narrows your safety buffer.

• Market volatility: Sharp price swings can erode your equity faster than expected.

• Accumulated fees: Daily fees eat into your equity over time, even in sideways markets.

• Platform-specific rules: Each platform defines its own liquidation margin thresholds and may use buffers for added protection.

Leveraged tokens

Leveraged tokens are a more accessible way to gain leveraged exposure to a crypto asset. They’re designed to track a multiple of the daily return of an underlying asset – for example, 2x long BTC rises 2% when BTC goes up 1%, and drops 2% when BTC goes down 1%.

The key difference? With leveraged tokens, you don’t borrow funds or manage margin manually. Instead, the token itself handles everything in the background. It automatically rebalances to maintain its target leverage and removes the risk of liquidation. 

Leveraged tokens are separate assets that fluctuate with the price of the underlying cryptoasset, like Bitcoin, rather than the actual asset itself. With margin trading, you're trading the actual asset, just with enhanced exposure. That distinction makes leveraged tokens more accessible for everyday traders.

Let’s break it down:

• You buy a leveraged token just like you’d buy any other crypto.

• There’s no need to manage collateral, borrow funds or watch liquidation levels.

• The leverage is built into the token, and it’s rebalanced daily to stay at the target multiple.

This makes leveraged tokens ideal for:

• Short-term trading strategies in trending markets

• Users who want to leverage without the complexity of managing a margin position

• Avoiding liquidation risk and sudden position closures

However, there’s a trade-off. Because the token rebalances every day, returns can be affected by market volatility – especially in sideways markets. This can reduce the token’s effectiveness over time and make long-term holding less efficient.

In short, leveraged tokens aim to simplify exposure by reducing operational complexity, but their structure typically makes them more suitable for short-term scenarios than long-term holding.

Perpetuals and futures

Perpetual contracts and futures are both types of derivatives – financial instruments that derive their value from an underlying asset, like Bitcoin or Ethereum. Instead of buying the asset itself, you trade on its price movements.

What’s the difference between the two?

• Futures are agreements to buy or sell an asset at a fixed price on a specific date in the future. Once the contract expires, it is settled – either in cash or by delivering the asset.

• Perpetual contracts work similarly but without an expiry date. You can hold the position as long as you want, as long as you maintain the required margin.

To keep perpetual contracts trading close to the market price of the underlying asset, there’s a mechanism called funding fees. These are periodic payments between long and short positions, depending on which side is more in demand. If you're holding a position when the funding is due, you either pay or receive a fee.

Why use them?

Both futures and perpetuals allow traders to open highly leveraged positions – sometimes 50x or more. That means a small change in price can lead to significant gains or losses. These products are popular among institutional and professional traders for:

• Arbitrage: profiting from price differences across markets

• Hedging: offsetting potential losses in other positions

• Speculation: taking positions on price movements without owning the asset

• High-frequency trading: executing many trades quickly using algorithms

But with high leverage comes high risk. Sudden price swings can lead to liquidation – where your position is forcibly closed and your margin is lost. The more leverage you use, the smaller the price movement needed to trigger a liquidation.

Because of their complexity, volatility and cost structures (like funding fees), these instruments require a strong understanding of how derivatives work. Unless you’re already comfortable with leverage, it can be wise to stick with more accessible options like margin trading or leveraged tokens.

Smart strategies and risk control

Leverage is powerful, but it needs discipline. Without a risk strategy, even experienced traders can be caught out. Here are some tips on how to stay ahead:

• Use stop loss orders to limit downside risk. These automatically close your position at a pre-defined loss level.

• Set take-profit orders to lock in gains. This helps avoid getting greedy or missing your ideal exit.

• Size your positions carefully. Don’t use all your capital on one trade. Diversification applies to leveraged trades, too. You can also adjust your exposure by adding to or reducing an existing margin position, depending on your strategy and market conditions. Only use capital that you can afford to lose. 

• Understand liquidation levels. If your margin falls below the maintenance level, your position may be liquidated. Always know where this level lies and monitor it actively.

Common mistakes and how to avoid them

New to leverage? Here’s what to watch out for:

• Going all-in on one trade: It only takes one wrong move to lose everything. Keep margin positions small.

• Skipping the learning curve: Just because it’s easy to click “5x” doesn’t mean you should. Learn how the tools work before you use them.

• Emotional trading: Losses hurt – but doubling down emotionally often leads to bigger ones.  

• Neglecting market conditions: Volatile or illiquid markets can spike in either direction. Trade only when you understand what’s moving the market.

• Ignoring fees: Leveraged products often come with overnight fees, funding costs, liquidation fees and spreads. These eat into profits over time and influence your margin.

How fees affect your leveraged trades

Fees are an often-overlooked factor that can have a major impact on your performance,  especially when trading with leverage. These are the main ones to consider:

• Buy fees: Charged when opening a leveraged trade. 

• Funding fees (or interest fees): Charged for holding a margin position open. Timing varies by platform.

• Liquidation fees: Applied if your position is automatically closed due to insufficient margin.

• Closing fees: Taken when you manually exit a leveraged trade.

Example (illustrative only): An individual opens a €5,000 margin position using €1,000 of their own funds as collateral and incurs a daily funding fee calculated on the full position. At a rate of 0.15% per day (used here for illustrative purposes only), this would amount to €37.50 in fees over five days, equivalent to 3.75% of the initial collateral, even if the market price remains unchanged.

If the position were later liquidated, an additional liquidation fee could be deducted from the remaining equity.

Actual fee rates, calculation methods, and liquidation costs vary by provider and product.

Always factor in the cost of holding and closing trades, especially if your strategy involves longer timeframes or high leverage. Small fees can compound into large costs and reduce your ability to recover from downturns.

Additional risks when using margin trading

Margin trading involves borrowing funds to increase market exposure. While this can magnify potential returns, it also substantially increases the risk of losses. Because positions are leveraged, even small price movements can lead to margin calls or the forced closure of positions, which may result in the partial or total loss of the funds committed as collateral.

Ongoing costs, such as interest or funding fees, may apply and can reduce margin levels over time, particularly if positions are held for extended periods.

Margin trading is complex and carries a high level of risk. It requires a clear understanding of how leverage, fees, and liquidation mechanisms work. Users should carefully consider whether they fully understand these risks before engaging with margin trading products.

Conclusion

Margin trading can be exciting but it’s not a simple shortcut to success. It’s a tool that rewards knowledge, preparation, patience and control. Whether you're trading with 2x or 10x leverage, understanding your position size, using risk controls and staying informed makes all the difference. Start small, build confidence over time and never trade with more than you’re prepared to lose.