Leverage Trading in Crypto: How Margin Works in Perpetual Futures

Leverage trading in crypto allows traders to create and control larger trading positions with smaller amounts of capital. When trading crypto perpetual futures (“perps”), traders do not need to put up the full value of a position to get increased exposure. Instead traders can use deposited collateral, which acts as margin, to open leveraged positions.

While leverage allows traders to generate increased returns, it can also quickly lead to increased losses. In perpetual futures trading, small price movements in assets may be enough to liquidate a leveraged position if a trader’s margin is not managed appropriately.

This guide explains how margin works in crypto perpetual futures, the effects of leverage on profits and losses, why liquidations occur, and the risks associated with leverage and margin when trading perps.

What Is Leverage in Perpetual Futures?

Leverage in perpetual futures is borrowing power that lets a trader increase their exposure when taking a position. Put simply, it allows traders to open positions that are larger than the amount of money they have deposited to trade.

Therefore, instead of paying for the full value of a position outright, traders can post collateral as margin, and then receive a bigger position size when trading perpetual futures contracts.

This allows traders with the same amount of margin to take varied position sizes depending on their risk profiles. Leverage acts as a multiplier, magnifying both profits and losses equally.

Here are some examples of leveraged positions using $100 in margin:

What Is Margin in Perpetual Futures?

Margin is the collateral required to open (and maintain) a leveraged perpetual futures position.

Unlike buying crypto on the spot market, a trader using margin does not need to put up the full value of the trade. Instead, they must simply deposit the sufficient amount of collateral to allow them to control a larger position.

Traders should be aware of two main types of margin when using leverage and trading perps, initial margin and maintenance margin.

Initial Margin

Initial margin is the minimum amount of collateral required to open a position. The amount of initial margin required depends on the trader’s desired notional position and leverage.

For example, a trader seeking $1,000 in long exposure via Bitcoin perps can open a 10x Bitcoin long trade with $100. However, another trader aiming to use less leverage, like 5x, will need to use $200 in margin in order to gain the same notional position size.

Maintenance Margin

Maintenance margin refers to the minimum amount of collateral required to keep a perps trade open.

When a trade begins losing money, the available margin begins to shrink. Margin available may also decline as funding rates are paid to keep the position open.

If available margin falls far enough it could drop below the maintenance margin requirement, leading to liquidation or a forced closing of the position to prevent further losses.

Margin vs. Notional Value: What’s the Difference?

If a trader is using margin to create leveraged positions, they might confuse their deposited collateral with their notional positions or value.

While margin is the amount of collateral deposited, notional value refers to the amount of exposure a trader receives after leverage is applied.

As an example, a trader that deposits $1,000 worth of collateral and opens a 10x leveraged Ethereum position has $1,000 worth of margin, but $10,000 worth of notional value.

How Leverage Impacts Profit and Loss in Crypto Perps

Leverage acts as an amplifier of profits or losses, simultaneously increasing the potential for gains and losses for traders.

When using leverage, the market gain or loss for an asset like Ethereum is simply multiplied by the leverage a trader elects to use.

For example, a trader that opens a 10x leveraged long position in Ethereum will see a 10% gain when Ethereum jumps just 1%. Similarly, a 5x Bitcoin long will register a 50% gain if Bitcoin’s market price moves 10% while the position is open.

When using leverage with crypto perpetuals, the profits generated in these scenarios is based on the margin the trader used to open the position.

In other words, if the Ethereum trader had $1,000 worth of margin on their 10x leveraged long, a 1% jump in ETH’s price results in a 10% gain on their collateral of $1,000. This results in a $100 profit for the trader. If the 5x levered Bitcoin trader had $1,000 worth of margin and a $5,000 notional value, their 50% gain will give them $500 in profits.

These same scenarios multiply losses as well, increasing risk of loss or liquidation as leverage is added.

Why High Leverage With Crypto Perps Is Risky

Using high leverage may be enticing to some crypto traders because it allows for potentially large gains from relatively small deposits and price movements.

However, the tradeoff is that it equally magnifies the risk of loss and increases the chances of liquidation or the forced closure of a perps position.

Bitcoin routinely gains or loses 2-4% in a single day of trading. If a trader is using low leverage, like 2x, they can manage that level of volatility if the price moves against their position. Yet, as leverage increases, those common daily swings can mount losses or lead to liquidation of open positions.

The following table provides insight into the margin requirements and the respective moves that can lead to liquidation depending on the leverage a trader elects to use. Given the volatility of Bitcoin, a trader may start to feel significantly impacted at 10x leverage.

Once leverage moves to 25x, a 4% daily move in the price of BTC can trigger a liquidation. Even smaller market movements, around 1% at 100x, can lead to liquidation.

An example:

A trader uses $100 of collateral to open a Bitcoin long when BTC is trading at $100,000, because they think the price of Bitcoin is going up. At 5x leverage, the $100 of collateral grants exposure of $500 in notional value.

• If Bitcoin jumps 10% to $110,000, the trader earns 50% with their 5x leverage, netting them $50 in profits.
• If Bitcoin drops 10% to $90,000, the trader loses 50%, meaning their available margin has fallen to $50.
• If Bitcoin drops 20%, the trader’s position will be liquidated, closing their position and resulting in the loss of their $100 collateral.

Actual liquidation prices can vary between exchanges depending on maintenance margin requirements, fees, and funding payments. Margin liquidation can also vary based on the way it is allocated.

Disclaimer: Prior examples and tables use simplified numbers to explain margin and liquidation concepts. Actual liquidation points and margin requirements will vary.

Cross Margin vs. Isolated Margin

When opening a perpetual futures position, traders also need to elect how their margin will be allocated.

If a trader chooses to utilize cross margin, their collateral is shared across multiple open positions. In other words, the trader’s entire futures account balance can act as margin for multiple perpetual futures contracts.

In this scenario, when one position begins to lose, the rest of the account balance is used to keep it open and maintain margin requirements.

On the other hand, isolated margin limits the risk to just the collateral assigned to a specific trade. For example, if a trader has a $1,000 futures account balance and uses $100 in collateral for a 10x leveraged trade, only the $100 in margin assigned to the open position is at risk of liquidation.

On Kalshi’s CFTC-regulated exchange, only isolated margin mode is available to mobile app traders, lowering risk of cross-position liquidations.

A full comparison of cross margin and isolated margin will be explored in a future article.

Maximum Leverage on Kalshi

Kalshi’s regulated platform allows U.S. traders to gain the following maximum leverage across some of crypto’s most popular assets:

Frequently Asked Questions

Conclusion

Leverage is one of the most prominent features in crypto perps trading, allowing traders to control and manage their positions with much more value than they deposited. While this can magnify the potential size of gains relative to the collateral at stake, it also enhances the risk.

Understanding the relationship between leverage, margin, notional value, and liquidation will better help traders make informed decisions before opening a perpetual futures contract position.

This is not financial advice. Trading on Kalshi involves risk and may not be appropriate for all. Members risk losing their cost to enter any transaction, including fees. You should carefully consider whether trading on Kalshi is appropriate for you in light of your investment experience and financial resources. Any trading decisions you make are solely your responsibility and at your own risk. Information is provided for convenience only on an "AS IS" basis. Past performance is not necessarily indicative of future results. Kalshi is subject to U.S. regulatory oversight by the CFTC.