Dear reader! Let’s talk about something personal that most crypto traders ignore until it’s too late: leverage. Yes, that little slider on your exchange that lets you multiply your position size by 10x, 25x, or 100x. My guess is that the first time you discovered leverage in crypto, you probably thought you could make 10 times more money on the same trade.
It most likely felt like a cheat code or a shortcut to riches. Then, suddenly, you lost a trade that wiped out your entire balance in seconds. Well, this is a common experience with this tool, as it is one of the riskiest tools in all of finance.
But, wait, I am not here to scare you. Instead, I am here to help you understand how leverage works because you deserve to trade with clarity and confidence, not anxiety and regret. That said, let’s dig into what leverage really is.
KEY TAKEAWAYS:
- Leverage is when you borrow money from an exchange to open a bigger position than your actual balance would allow.
- Leverage feels addictive because it plays into emotions like greed, ego, revenge, and the illusion of mastery.
- Using leverage can lead to mental pressure, overtrading, and unrealistic expectations.
- If you must leverage, ensure you are smart about it and that it is with money you are willing to lose.
What Is Leverage in Crypto?
Leverage is when you borrow money from an exchange to open a bigger position than your actual balance would allow. For example, if you have $100 in your account:
- With 10x leverage, you can trade like you have $1,000.
- With 50x leverage, you’re playing with $5,000.
- With 100x leverage, you’re controlling $10,000.
If this sounds powerful, it’s because it is. Simply put, leverage amplifies everything, including your gains and losses. Therefore, you gain more if you’re right and lose faster if you’re wrong. However, the danger of this strategy is that most traders focus only on the gains and ignore the risk.
Why Leverage Feels So Addictive
Leverage gives that adrenaline that plays directly into the following emotions:
- Greed: Because people often enter into crypto to make money fast, leverage tells you not to settle for small gains when you can ”go big.”
- Ego: Winning with leverage can give a validating feeling that you are a smart trader.
- Revenge: Leverage offers a way to win back money you lost on a trade quickly.
- Illusion of mastery: One or two lucky wins with leverage can make you feel unstoppable. But winning with leverage doesn’t always mean you’re skilled; it just means the market went your way that time.
Read Also – An Introduction to Crypto Arbitrage Trading Strategies
The Hidden Costs of Using Leverage
Even if you’re not getting liquidated, leverage is quietly hurting you in the following ways:
- Mental pressure: Every small move when trading with leverage feels like life or death. You check charts constantly, can’t sleep well, and you second-guess your decisions. This stress eventually drains your mental energy, clouds your judgment, and makes you reactive instead of strategic.
- Overtrading: Because leverage makes every move feel more impactful, you start jumping into more trades just to chase that feeling. Ultimately, you might become addicted to the action instead of focusing on good setups.
- Unrealistic expectations: Using high leverage convinces you that 50% daily gains are normal and that you should be doubling your money every week. Soon, normal growth will feel too slow.
So, Should You Avoid Leverage Entirely?
Not necessarily because leverage, in itself, isn’t evil, as it’s just a tool. But like almost any other tool, it can either help you or hurt you. So the answer isn’t to never use leverage; instead, it is to use it with respect, strategy, and serious discipline.
7 Real Ways to Use Leverage Wisely
Now that you have a better understanding of what leverage is, here’s how to protect yourself while using it:
- Stick to low leverage like 1x–3x: This still gives you some flexibility but doesn’t put your whole account at risk over tiny price moves.
- Always use stop losses: Instead of waiting for liquidation, set a stop loss that makes sense based on your risk level, not your emotions.
- Size your positions properly: Just because you can open a huge position doesn’t mean you should. Generally, it is safer to risk only 1–2% of your capital on a single trade.
- Avoid leverage during high volatility: Stay away from leverage when there is news causing panic in the market.
- Take profits: Don’t fall for the “it might go higher” trap. Instead, secure gains and move your stop up to protect your position.
- Avoid revenge trading: Don’t jump right back into the market with more leverage after losing a trade in hopes of “getting it back.” It is better to first step away to clear your head.
- Journal your trades: Track when you used leverage, how it worked, how it felt, and what the outcome was. That way, you get to see patterns and avoid repeating the same mistakes.
Final Words
You don’t need leverage to succeed in crypto because the market already offers crazy volatility. Even spot coins can 2x, 3x, or 10x if you pick wisely and hold with patience. However, if you must leverage, ensure you are smart about it and that it is with money you are willing to lose.
References
- bitstamp.net – Leveraged Crypto Trading: Risks and Rewards
- hmarkets.com – Emotional Leverage – The Hidden Risk in Trading
- match-trade.com – Crypto’s Hidden Undercurrent: The Role of Leverage in Cryptocurrency Markets
