What is Leverage in perpetual trading?

Leverage is a trading feature that allows traders to borrow capital from the exchange to trade with larger funds. With leverage, users can increase their purchasing power, allowing them to trade with more capital than they have in their wallet.

Generally, leverage levels are described by ratios such as 1:5 (5x), 1:10 (10x), 1:20 (20x). The ratio indicates how many times the user's initial capital will be multiplied. For example, if you have $100 in your account but want to trade $500 worth of BTC, then 5x leverage will make $100 have the purchasing power of $500.

The advantage of using leverage is that it increases the potential profit obtained along with the capital that becomes larger. In addition, users can also increase the liquidity of their capital. So, instead of buying $ 100 worth of BTC, they can use $ 10 with 10x leverage. The remaining capital can be used to open new positions or used on the DeFi platform.

However, leverage also has higher risks. The higher the level of leverage used, the lower the tolerance for price volatility. Moreover, there is a risk of liquidation that can make you lose all your capital if the price movement does not go as expected.