Module 7: Perpetual Futures
Margin and Leverage
Chapter 4 of 14 · about 5 minutes
4.1 100x
The exchange's leverage slider went all the way to 100x. Mint moved it to the end and watched the "position size" number grow enormous.
"With $1,000, I could control $100,000 of bitcoin," Mint said.
"For about thirty seconds, maybe," said Hash. "At 100x, a move of less than 1% against you wipes out your entire margin. Let's understand exactly what that slider does before you ever touch it again."
4.2 Margin
Margin is the collateral you post to open and keep a leveraged position. It's not a fee or a down payment toward buying the asset. It's a security deposit that absorbs your losses.
There are two key margin levels:
Initial margin is the amount required to open a position. It equals the notional value divided by the leverage.
Initial margin = notional value ÷ leverage
Maintenance margin is the minimum margin required to keep the position open. If your margin, after unrealised losses, falls below this level, the position is liquidated (Chapter 8). It's usually expressed as a percentage of notional, such as 0.5%.
| Position | Value |
|---|---|
| Notional | $10,000 (0.1 BTC at $100,000) |
| Leverage | 10x |
| Initial margin | $10,000 ÷ 10 = $1,000 |
| Maintenance margin rate | 0.5% |
| Maintenance margin | $10,000 × 0.5% = $50 |
4.3 What leverage really does
Here's the most important idea in this chapter: leverage doesn't change how much you make or lose per dollar of price movement for a given position size. It changes how much collateral you post, and therefore how big the gains and losses are relative to that collateral.
Mint's 0.1 BTC position gains or loses $100 for every $1,000 move in BTC, whether Mint posts $10,000 (1x) or $1,000 (10x) as margin.
| BTC moves | Position PnL (0.1 BTC) | As % of margin at 1x ($10,000) | As % of margin at 10x ($1,000) |
|---|---|---|---|
| +5% | +$500 | +5% | +50% |
| +1% | +$100 | +1% | +10% |
| −1% | −$100 | −1% | −10% |
| −5% | −$500 | −5% | −50% |
| −9.5% | −$950 | −9.5% | −95%: liquidation |
At 10x, a 5% move against Mint loses half the margin. A move of about 9.5% leads to liquidation, once maintenance margin is accounted for.
"So higher leverage doesn't make the position bigger," said Mint. "It makes my margin smaller compared to the position."
"Exactly," said Hash. "Same position, thinner cushion."
4.4 How far can price move?
The higher the leverage, the smaller the price move needed to wipe out your margin. Here's the approximate move against a position before liquidation, assuming a 0.5% maintenance margin and ignoring fees.
| Leverage | Margin as % of notional | Approximate adverse move to liquidation |
|---|---|---|
| 2x | 50% | ~49.5% |
| 5x | 20% | ~19.5% |
| 10x | 10% | ~9.5% |
| 20x | 5% | ~4.5% |
| 50x | 2% | ~1.5% |
| 100x | 1% | ~0.5% |
Now compare that with Bitcoin's normal behaviour. In Module 4, Chapter 11, the illustrative daily ATR was about 2% of price. At 50x or 100x, ordinary daily noise is enough to liquidate a position. At 20x, a single unremarkable day can do it.
Chapter 4 · Leverage vs distance to liquidation
Horizontal bars show the approximate adverse move before liquidation, assuming a 0.5% maintenance margin and ignoring fees: 2x with 50% margin, about 49.5%; 5x with 20% margin, about 19.5%; 10x with 10% margin, about 9.5%; 20x with 5% margin, about 4.5%, which one unremarkable day can reach; 50x with 2% margin, about 1.5%; and 100x with 1% margin, about 0.5%, both inside an illustrative daily ATR of about 2%.
"So at 100x, I'm not trading bitcoin," said Node. "I'm trading random noise."
"And paying fees for the privilege," said Hash.
4.5 Leverage tiers
Exchanges limit maximum leverage based on position size. Large positions get lower maximum leverage and higher maintenance margin rates, because liquidating them is harder and riskier for the exchange.
| Position notional (illustrative) | Maximum leverage | Maintenance margin rate |
|---|---|---|
| Up to $50,000 | 100x | 0.5% |
| $50,000 to $250,000 | 50x | 1% |
| $250,000 to $1,000,000 | 20x | 2.5% |
| Above $1,000,000 | 10x or less | 5% or more |
These tiers vary widely by exchange and market. Smaller tokens usually have lower maximum leverage and higher margin requirements than BTC and ETH.
4.6 Effective leverage
The leverage slider shows the leverage on a position's margin. But the more important number is your effective leverage: the total notional of all your positions compared with your total account equity.
Effective leverage = total position notional ÷ account equity
| Value | |
|---|---|
| Account equity | $10,000 |
| Position | 0.3 BTC at $100,000 = $30,000 notional |
| Leverage slider setting | 20x (margin posted: $1,500) |
| Effective leverage | $30,000 ÷ $10,000 = 3x |
The slider says 20x, but relative to the whole account, Mint is 3x leveraged. What matters for Mint's overall risk is the 3x, along with whether the remaining equity can actually support the position, which depends on the margin mode (Chapter 5).
Hash's rule: "Think in terms of position size and effective leverage, not the slider. The slider only changes how much collateral is locked to that position and where it gets liquidated."
4.7 Margin ratio
Exchanges show a margin ratio or margin level for each position or account: how close you are to liquidation. Different exchanges calculate it differently, but the idea is the same. As unrealised losses grow, your available margin shrinks toward the maintenance margin. When it reaches that level, liquidation begins.
Watching the margin ratio is essential. Many traders set alerts well before the danger zone, so they can reduce the position or add margin.
4.8 Adding margin
If a position is moving against you, you can sometimes add margin to move the liquidation price further away. This can be useful when you're confident in your original analysis and the move is within your plan.
But it's also one of the most common ways traders turn small losses into large ones. Adding margin to a losing position, again and again, is like adding more money to a bet that's already losing because you can't accept being wrong. Chapter 14 returns to this.
4.9 Try it yourself
On a demo or testnet perp exchange, open a small BTC position at 5x, then the same size at 20x. Compare the initial margin and the liquidation price shown for each. Then calculate, for each, what percentage move would wipe out half the margin.
Key takeaways from this chapter
- Margin is collateral that absorbs losses; initial margin opens a position, maintenance margin keeps it open.
- Initial margin equals notional divided by leverage.
- Leverage doesn't change dollar PnL for a given position size; it shrinks the margin cushion relative to the position.
- Higher leverage means smaller price moves cause liquidation: about 9.5% at 10x and 0.5% at 100x.
- Exchanges reduce maximum leverage and raise maintenance margin for larger positions.
- Effective leverage, total notional divided by account equity, matters more than the leverage slider.
- Watch your margin ratio, and be careful about repeatedly adding margin to losing positions.