In this lesson
- understand the difference between spot and futures
- see how fast liquidation comes with leverage
- work out what funding costs
This lesson does not aim to teach you to trade with leverage. It aims to show you how it works and why most people lose money on it – so you know what you are getting into when an exchange offers you a "100× bonus".
Spot: you own the coin#
On spot you buy the actual cryptocurrency. When the price falls by 30%, you have 30% less – but you still have the coins and can wait – though nothing guarantees the price comes back. The worst possible case is a fall to zero: you lose what you put in, nothing more.
Futures: a bet on the price#
So-called futures are contracts on the price of a cryptocurrency. You do not own the coin. In crypto the most traded are so-called perpetual futures – contracts with no expiry date. They let you:
- trade with leverage – open a 10,000 € position with a 1,000 € deposit,
- profit from a fall (short) – which also means losing when the price rises.
The deposit that backs the position is called margin. And this is where the trouble starts.
Liquidation#
When the price moves against you so far that the loss eats almost all the margin, the exchange closes the position itself. This is called liquidation, and the margin is gone.
With 10× leverage, a move of roughly 9–10% against you is enough. With 20× about 5%, with 50× just under 2% – a normal Bitcoin move within a few hours.
An example from 5 March 2024: someone buys Bitcoin in the afternoon at 68,000 with 10× leverage. The liquidation price is roughly 61,500. A few hours later the price is at 59,005 – the position is liquidated and the margin is gone. By the end of the week Bitcoin is back at 69,000. Whoever bought on spot is in profit. Whoever bought with leverage has nothing.
- Buy (10×): 68,000
- Liquidation: 61,500
Funding: a fee for holding#
A perpetual contract has no expiry date. To keep its price close to the spot price, traders pay each other funding, usually every 8 hours. When the contract trades above the spot price (demand for longs, bets on a rise, is stronger), longs pay shorts; when it trades below, shorts pay longs. In euphoria that can be a lot.
A common baseline rate is 0.01% per 8 hours. That is 0.03% a day, roughly 11% a year of the position value. With 10× leverage that is over 100% of your margin a year – just for holding the position. In the heat of a bull market funding is often many times higher.
Regulation#
In the EU, crypto derivatives are financial instruments, and regulated exchanges and brokers have to follow rules that protect retail investors. For crypto CFDs leverage is limited to 2 : 1, and according to analyses ESMA cited in 2018, 74–89% of retail investor accounts lose money on CFDs. Platforms offering 50× or 100× leverage are usually based outside the EU and give no such protection.
Leverage is not for beginners
With leverage you can lose your whole deposit within minutes – even if you are right about the long-term direction. Until you have long experience with spot, small amounts and a plan, leave futures alone.
Common myths#
- "With 10× leverage I will make ten times more." And lose ten times faster. Liquidation comes before profit.
- "I will use a stop-loss, so I cannot be liquidated." In a fast market the stop-loss fills at a worse price – and funding and fees keep running.
- "A short is safe when I know it will fall." The market can rise for longer than you can hold out.
Summary
- On spot you own the coin and can lose at most your deposit; futures are a bet on the price.
- With 10× leverage liquidation comes after a 9–10% move, with higher leverage even sooner.
- Funding is paid every few hours and over a year can eat a large part of the margin.
- 50× leverage and more usually means a platform without EU protection – and, for a beginner, a fast road to zero.