⚙️ How leverage works in centralized exchanges

🔑 Basic concept

Leverage: Multiplies a trader's exposure. For example, with 10x leverage, a deposit of $100 allows for a position of $1,000.

Initial margin: It is the capital that the trader must provide as collateral.

Borrowed funds: The exchange lends the rest, allowing control of a larger position.

📊 Key mechanisms

Maintenance margin: Minimum level of collateral that must be maintained. If the position value drops too much, the exchange automatically liquidates to cover the loan.

Liquidation: If the market moves against and the margin falls below the threshold, the position is automatically closed.

Funding rates: In perpetual contracts, traders pay or receive a periodic fee to keep positions open.

Types of leverage:

Isolated margin: The risk is limited to the amount invested in that trade.

Cross margin: The risk is shared with the entire account balance, potentially losing more capital.

🚀 Practical example

You deposit $500 in a centralized exchange.

You use 5x leverage → you control a position of $2,500.

If the price increases by 10%, your profit would be $250 (instead of $50 without leverage).

If the price decreases by 10%, your loss would be $250, and you could be liquidated if your margin falls too much.

📋 Advantages and risks

AspectAdvantage ✅Risk ⚠️Initial capitalAllows for large positions with little moneyYou can lose your capital more quicklyProfitsMultiply proportionallyLosses are also amplifiedFlexibilityLong (bullish) or short (bearish) positionsHigh volatility can cause liquidationAccessibilityExchanges like Binance, KuCoin, Bybit offer up to 100xHigh leverage is extremely risky

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🔮 Perspective

Leverage in centralized exchanges is a powerful but dangerous tool. It is recommended to use it with low levels (2x–5x) and always with risk management (stop-loss, isolated margins).