Leverage Explained: The Essential "Amplifier" in Crypto Trading You Need to Understand

In cryptocurrency trading, an increasing number of newcomers encounter the term "leverage multiple." While many platforms advertise 20x, 50x, or even 100x leverage, understanding what these numbers actually mean is crucial. This article will help you understand the role, risks, and smart usage of Leverage Multiple in the crypto world using simple language.

What is Leverage Multiple?

Figure: https://www.gate.com/futures/USDT/BTC_USDT

"Leverage multiple" simply means how much additional funding you borrow using your own capital to amplify your trades. For example, if you have $100 and use 10x leverage, you can control a position worth approximately $1,000. In other words, you use your own $100 to borrow $900. Theoretically, if the price moves in your expected direction, you'll earn more; but if it moves in the opposite direction, you'll lose faster. Suppose you have 100 USDT and use 2x leverage; you can open a position worth 200 USDT. Once your loss exceeds 50%, your position will be liquidated. The higher the leverage multiple, the smaller the adverse price movement you can withstand before liquidation.

Practical Application of Leverage Multiple in the Crypto Market

In traditional finance, leverage has long been common. But in the crypto world, leverage is used more frequently due to high price volatility, 24/7 market operations, and diverse trading instruments. For instance, some reports indicate that certain trading platforms now support leverage up to 150x. Additionally, the market recently experienced the "largest liquidation event in history": in October 2023, over $19 billion was liquidated in a single day, with many positions being forcibly closed due to excessive leverage.

These clearly illustrate that in the crypto market, leverage multiple isn't just an opportunity amplifier but can also become a risk trigger point.

Advantages and Risks of Leverage Multiple

Advantages:

• Leverage allows small capital for larger positions: For newcomers with limited funds, moderate use of leverage can improve capital efficiency.
• Trade both long and short: Whether you're bullish or bearish, crypto futures or perpetual contracts allow you to explore opportunities using leverage.

Risks:

• Higher liquidation risk: The higher the leverage multiple, the faster your own capital can be depleted with just a slight price movement in the opposite direction. As mentioned earlier, 10x leverage means you can only withstand about a 10% loss before facing potential liquidation.
• Psychological burden and slippage: In extreme market conditions, mass liquidation of highly leveraged positions can trigger price crashes and increased slippage, with risks far exceeding your expectations—as demonstrated by the $19 billion liquidation event.
• Different liquidation mechanisms across platforms: Different platforms have varying approaches to positions, margins, margin calls, and forced liquidations. The higher your leverage, the more uncertainty factors you'll face when things go wrong.

Latest Market Dynamics: The Relationship Between Liquidations and Leverage Multiple

In mid-October 2023, the crypto market experienced a shocking fluctuation with unprecedented liquidation amounts. Data shows: retail traders' average leverage ratio surged to 10x, and the overall market leverage ratio reached new highs. This indicates that when most people use higher leverage, a market reversal can cause chain-reaction liquidations. This event serves as a warning that in the crypto market, prudence outweighs higher leverage.

Therefore, newcomers should avoid blindly chasing high leverage just because a platform advertises "xx times leverage." Choosing the right leverage multiple is key to reducing the possibility of liquidation.

How Should Beginners Choose Appropriate Leverage Multiple?

• Risk tolerance assessment: First ask yourself, how much can you afford to lose if prices move against you? What's your stop-loss setting? If you can only tolerate a 5% loss of your capital, then a lower leverage multiple might be appropriate.
• Control leverage multiple: For beginners, starting with 2-5x leverage is recommended. Research indicates that 3-10x leverage is more suitable for most trading scenarios.
• Set stop-losses and phase your entries: Rather than going all-in with high leverage, build positions gradually and set stop-losses for safer trading than blindly chasing high returns.
• Understand exchange rules and liquidation mechanisms: Learn about your platform's maximum allowed leverage, maintenance margin requirements, and liquidation processes.
• Exercise caution with news-driven markets: As mentioned earlier, significant volatility often accompanies policy changes or macroeconomic events. When most traders use high leverage, risks become more concentrated.

Conclusion

Leverage multiple is a double-edged sword in crypto trading. Used wisely, it can enhance capital efficiency and expand returns; used improperly, it can lead to instant liquidation and severe losses. For beginners, understanding the concept, controlling your leverage, and strictly adhering to stop-losses are keys to entering the market prudently. Remember: in the highly volatile crypto world, select leverage multiples based on appropriateness, not magnitude.