Leverage: How to Use the Double-Edged Sword
Guest writer: @deltaxbt
What Is the Purpose of Leverage in Crypto? Generally, the purpose of leverage is to increase the potential return on an investment.
By borrowing money to invest, an investor can potentially earn a higher return than if they had invested only their own capital.
But when it comes to the crypto space, leverage has a far more important role, mitigating counterparty risk.
The Origins of Leverage in Crypto
After the Mt. Gox saga, where the platform lost about 850,000 Bitcoins (most belonging to users), traders were reminded just how dangerous it is to hold all assets in one place.
Even though the risks were known, people still wanted to buy, sell, and trade crypto, and they took the chance.
Then came BitMEX, launched in 2014, one of the pioneers in the leverage space, offering leveraged products to clients with up to 100x leverage.
This innovation allowed users not only to amplify potential profits, but , more importantly; to expose only a fraction of their capital to third-party risk.
For example, instead of depositing 100% of funds onto an exchange, a trader could deposit 10% and use 10x leverage to control the same notional size, hedge positions, or take extra exposure knowing their true exposure was limited.
The Same Risk, Still Present
As the FTX collapse showed, funds are never truly safe when sitting on centralized platforms — they can disappear overnight. These third-party risks still exist today.
(SBF, Zhu Su, Kyle Davies, and Do Kwon, all destroyed by leverage, collectively losing over $60B.)
Nowadays, nearly all major exchanges offer leveraged products.
And while leverage can be powerful, it’s also incredibly dangerous when misunderstood.
The Two Sides of Leverage
There are countless upsides and downsides to using leverage, but two are far more important than the rest:
Reducing Counterparty Risk, By using leverage, you can reduce your exposure to the exchange that holds your funds.
Amplifying Potential Returns, Leverage magnifies returns on both sides. It can multiply profits… But also losses.
Yes, you can make more money using leverage.
But for every success story about a trader making millions, there are thousands who got wiped out and lost everything, often very, very quickly.
The Forgotten Purpose
The reason I wanted to write this article is simple:
Most people today think leverage exists only to increase returns.
They forget its original goal: Reducing counterparty risk.
Leverage, just like a stop loss, is first and foremost a risk management tool.
The Reality of Using Leverage
When using leverage, always remember: it increases losses just as easily as gains, and can wipe you out faster than you think.
At 20x leverage, a move of just 5% against you can liquidate your entire position.
(And with fees, liquidation penalties, and slippage, it might only take 4%.)
When to Use High Leverage (Above 3x)
Use high leverage only in these specific cases:
High-Probability Setups
When invalidation is close, and the trade’s probability of success is genuinely high.
Remember: probability, not reward, is what matters.
If you don’t have high conviction (supported by a journal and data), high leverage isn’t worth it.
Hedging Spot Positions
If you’re neutral and using leverage to hedge, you’re not exposed to directional loss or gain.
But even then, liquidation is almost always a negative event.
(Leverage can also come in the form of options, but that’s a topic for another post.)
Conditions Are Primed for Risk-Taking
You can prove it, through your journal, data, and historical patterns, that it’s a good time to take risk.
Don’t assume.
If you can’t back it with data, it’s a coin-flip gamble.
Even in these cases, avoid high leverage for long periods of time.
The more time passes, the more variance creeps in, and eventually, variance wins.
The Addiction Trap
In conclusion, leveraged trading can bring incredible results and fortune to some.
But remember, you’re using leverage while trading the most volatile and dangerous asset class in existence.
Ninety percent of the time, trading crypto assets is wild enough on its own.
Add leverage, and things can get chaotic… Fast.
1- Use leverage wisely.
2- Don’t let greed-fueled trades cloud your judgment.
It’s never worth it.
For every success story, there are thousands of sad ones.
Roughly 95% of traders who lose everything and never come back do so because they were too greedy, they simply swiped the leverage bar too far right.
Final Thoughts
Let your fear use leverage to reduce risk, not your greed to let it ruin you.
Let your journal guide when to use it, and how much. Not your permabull CT anon who says it’s the start or end of a new supercycle.
Remember, Anon
With great leverage comes even greater responsibility.
Disclaimer: The ideas shared in this article reflect the author’s personal views and experiences, not Kuma’s. The platform simply provides space for traders and writers to share their perspectives. Nothing here should be considered financial advice. Always do your own research.
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