Ventuals

What is leverage?

Leverage explained: how it works in perpetual futures, a worked pre-IPO example, liquidation math, and how to pick a leverage level.

By Emily Hsia·Updated

Three stacks of coins rising from left to right in increasing heights — a visual metaphor for amplifying leverage ratios

Leverage is the use of borrowed capital to take a position larger than the cash you actually put up. In a perpetual futures trade, a small amount of margin controls a much bigger notional position — amplifying gains and losses in equal measure.

This page focuses on leverage as it shows up inside a perpetual future: how the math works, where liquidation kicks in, and how to pick a sensible leverage level.

What is leverage?

Leverage is usually written as a ratio: 5x, 10x, 20x. The number tells you how much bigger your position is compared to the collateral you posted.

  • 5x leverage — every $1 of margin controls $5 of exposure.
  • 10x leverage — every $1 of margin controls $10 of exposure.
  • 20x leverage — every $1 of margin controls $20 of exposure.

That's the whole idea. You put up a fraction of the position's notional value as margin, and the venue extends the rest as leverage. When you close the position, your profit or loss is calculated on the full notional — not on the margin you posted.

Leverage vs. margin

Margin and leverage are two sides of the same mechanism, but they are not the same thing.

  • Margin is the collateral you post — real dollars sitting in your account as a deposit against the position.
  • Leverage is the multiplier the venue applies to that margin to determine how much exposure you actually have.

The one equation worth remembering:

Notional position size = margin × leverage

Post $1,000 of margin at 10x leverage and you're running a $10,000 position. Post $1,000 at 2x and you're running a $2,000 position. The margin is yours; the rest is the venue's balance sheet backing your exposure.

How leverage works in a perpetual futures trade

When you open a perp position, the venue asks for two things:

  • Initial margin — the collateral required to open the trade. At 10x leverage, you need 10% of the notional size up front.
  • Maintenance margin — the minimum collateral required to keep the position open. Typically well below initial margin (often 0.5–1% of notional).

Once the position is live, your P&L moves roughly in lockstep with the underlying, scaled by the leverage ratio:

% change in your margin ≈ leverage × % change in the underlying

A 1% move in the underlying is a 10% swing on margin at 10x. A 1% move is a 50% swing at 50x. If unrealized losses drop your equity below the maintenance margin threshold, the venue liquidates the position — closes it automatically, seizes the remaining collateral, and you lose the posted margin.

A worked example: 10x leverage on a pre-IPO perp

Imagine a perpetual future tracking SpaceX's implied valuation. The setup:

  • Margin posted: $500
  • Leverage: 10x
  • Notional size: $5,000 long
  • Entry mark price: $100 per contract
  • Maintenance margin: 1% of notional ($50)

Three scenarios:

Scenario 1 — mark price rises 5% to $105. The position is up $250. That's 5% at the contract level, but 50% on your $500 of margin. Close the position and you walk away with $750 (before funding and fees).

Scenario 2 — mark price falls 5% to $95. You're down $250 — half your margin, gone on a 5% move. The position is still open (equity of $250 is above the $50 maintenance threshold), but the margin is thin.

Scenario 3 — mark price falls 10% to $90. The $500 notional loss wipes out your margin. Somewhere before the price reaches $90, your equity falls below the maintenance threshold and the position gets liquidated. You lose the full $500, regardless of what the price does after that.

The pattern is the same at every leverage level: a roughly (100 ÷ leverage)% adverse move is enough to wipe out your margin. 10% at 10x. 5% at 20x. 2% at 50x. For a fuller walkthrough of how this plays out in pre-IPO markets, see how to buy SpaceX stock before the IPO.

The risks of leverage

Leverage is symmetric by construction — it amplifies gains and losses equally. But the realized risks are asymmetric, because losses compound into liquidations in ways gains do not compound into free money.

  • Liquidation risk. Once you're liquidated, you're out. A rebound doesn't restore the position. The higher the leverage, the smaller the move needed to trigger it.
  • Funding-cost drag. Perpetual futures charge a recurring funding payment between longs and shorts. On a high-leverage position held for days or weeks, funding can meaningfully erode P&L even if the price moves your way.
  • Fee drag. Every entry, exit, and liquidation incurs fees. On thin margin, fees matter more.
  • Counterparty risk. A perp is a contract with the venue. If the platform is insolvent, manipulated, or paused, your leveraged position is exposed.

How to choose a leverage level

There is no universal "right" leverage ratio — it depends on the asset's volatility and how much adverse movement you want to survive.

  • Beginners should generally stick to 2–3x on volatile underlyings like crypto or pre-IPO valuations. That gives a buffer of 30–50% adverse movement before liquidation — enough to absorb ordinary volatility without being forced out.
  • Experienced traders calibrate leverage to the asset's realized volatility and their own stop-loss discipline. On a highly volatile pre-IPO perp, even 10x can be aggressive.
  • Available ≠ advisable. Some venues offer 100x+ leverage. At 100x, a 1% move is a full wipeout. That's a payout profile closer to a binary option than a trading position, and most retail traders who use it lose.

The general rule: pick leverage by working backwards from the move you can stomach, not by maxing out what the venue offers.

The bottom line

Leverage is the amplification tool inside a perpetual futures trade. It lets a small amount of margin control a much bigger position, so your returns scale with the leverage ratio — and so do your losses. The higher the leverage, the smaller the adverse move needed to wipe out the margin entirely.

Used carefully, leverage makes perps a capital-efficient way to get directional exposure to markets — including pre-IPO companies — that would otherwise require much larger commitments. Used carelessly, it's the fastest way to lose everything you posted.

This article is for general informational purposes only and is not financial advice. It is not a recommendation or offer to buy, sell, or invest in any security, asset, or product. Always do your own research and consult qualified professional advisors before making investment decisions.

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