Understanding Leverage in Crypto Margin and Futures Trading

This article explains how leverage works in crypto margin trading and futures contracts. In margin trading, traders post collateral and borrow funds from peers at floating rates. Exchanges set maximum leverage to protect lenders and enforce automatic liquidation if collateral falls below maintenance levels, helping manage risk and interest rate exposure. In cryptocurrency futures, leverage is determined by the exchange. For example, BitMEX lets traders open 100 BTC positions by posting 1 BTC as initial margin. Futures contracts trade on a separate order book with fixed financing costs implied by the basis between spot and futures prices. Traders know the forward rate in advance and can hold positions until contract expiry, subject to maintenance margin requirements. Key takeaways: - Leverage in margin trading is borrowed from other users at variable rates. - Leverage in futures is set by the exchange with fixed implied rates. - Both models enforce maintenance margins to limit counterparty risk and ensure orderly liquidations. Understanding these mechanisms helps traders choose the right leverage strategy and manage interest rate risk and liquidation thresholds effectively.