Spot, futures, leverage and liquidation
What you buy on spot is yours; on futures you open a position on price with borrowed money, and as leverage grows a small move against you can wipe out your entire margin.
When you buy a coin on the spot market, the coin really becomes yours. Even if the price halves, the coin stays in your wallet; the loss only becomes real when you sell. On the futures market you do not buy the coin itself but a contract on its price. With this contract you can bet on a rise (long) or a fall (short), and you can use leverage.
Leverage means borrowing from the exchange on top of your own money to open a bigger position. At 10x leverage, 100 dollars of margin opens a 1,000-dollar position. If price rises 1 percent you make 10 dollars, which is 10 percent of your margin. The same works in reverse: if price falls 1 percent you lose 10 percent of your margin.
In the chart above the top line is ‘ENTRY’, a hypothetical long position opened at today's price. The dashed lines below it are liquidation levels: at 20x leverage, when price falls about 4.5 percent, and at 10x, when it falls about 9.5 percent, the exchange closes the position by force and most of the margin is gone. The calculation is approximate; the exchange's maintenance margin and fees pull this level a little higher.
Looking at the candles on the chart you can see how short these distances are: most crypto moves this much within a few days. So at high leverage, even if your idea is right, an ordinary dip before price reaches the target can take you out of the game.
On a short position the maths works the other way: you lose as price rises, and the liquidation level sits above the entry. Since there is no theoretical ceiling on how far price can rise, using a stop matters even more for shorts.
How to read it
- Before choosing leverage, look at the size of the last few days' candles on the chart. If your liquidation distance is inside that normal movement, the leverage is too high.
- Write the stop price into your plan, not the liquidation price. The stop must trigger long before liquidation; liquidation is not a plan, it is an accident.
- Size the position by risk, not by leverage: the answer to ‘what share of my margin do I lose if I get stopped out?’ should be small.
- Buying and holding on spot and opening a leveraged futures position are different jobs. For an idea you are unsure about, spot gives you time; leverage does not.
Trap
The most common mistake is raising leverage because ‘my idea is right’. Leverage does not change how right your idea is; it only shrinks your margin for error. The second mistake is not knowing that in cross margin a single bad position can burn the whole account. The third is forgetting funding fees: keeping futures positions open for a long time can create a regular cost.
Tip
The opportunity agent and the analysis screen ask you to choose between spot and futures for crypto. After this lesson, choose like this: spot if your idea spans weeks and you want to sit through swings; low-leverage futures if it is a short-term idea with a clear stop and you have calculated your risk.
Glossary
- Spot
- The market where you buy and sell the asset itself.
- Futures
- The market where you trade contracts on an asset's price and can bet on a rise or a fall.
- Leverage
- Borrowing on top of your margin to open a bigger position; it enlarges both gains and losses.
- Liquidation
- The exchange closing a position by force when losses have almost used up the margin.
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See the spot and futures options in a Bitcoin analysis →For information only, not investment advice.