Leverage Mechanics

Leverage mechanics refer to the system of using borrowed capital to increase the potential return of an investment. In cryptocurrency derivatives, traders deposit collateral, known as margin, to control a position size significantly larger than their actual capital.

The exchange provides the remaining capital, which allows the trader to amplify their exposure to price movements. However, leverage also amplifies losses, meaning a small adverse price movement can lead to the total loss of the initial margin.

Understanding how leverage affects the maintenance margin and liquidation price is essential for risk management. It is a core component of both speculative trading and professional hedging strategies.