Leverage, funding and liquidation: perpetual futures basics
How leverage works in crypto futures, why funding is paid and when liquidation happens, explained with simple examples.
Most trading volume on crypto exchanges happens not in spot but in perpetual futures. They let you trade with leverage, and for the same reason they can lose money fast for anyone who does not know the rules. Here are the three core ideas with simple examples.
Leverage: a position several times your collateral
Leverage lets you open a position several times the size of your collateral. $1,000 of collateral at 10x is a $10,000 position. If price moves 1% in your favour you make $100, which is 10% of your collateral. It works the same way in reverse: a 1% move against you costs 10% of your collateral.
Liquidation: the forced close
If losses push your collateral below a certain level, the exchange closes your position automatically. That is liquidation. In the example above, a move of about 10% against you wipes out the collateral. Because exchanges keep a “maintenance margin”, liquidation actually happens a bit earlier. The higher the leverage, the smaller the move needed: at 50x, less than 2% can be enough.
Funding: the fee that ties price to spot
Perpetuals never expire, so their price is kept close to spot by regular payments called funding, usually calculated every 8 hours:
- If the perp trades above spot, funding is positive and longs pay shorts.
- If it trades below spot, funding is negative and shorts pay longs.
Funding is paid on the full position size, so on leveraged positions it adds up quickly.
This guide is for information only and is not investment advice. Leveraged trading can lose your entire collateral.
The numbers
Distance to liquidation (approximate, before maintenance margin):
| Leverage | Adverse move that wipes the collateral |
|---|---|
| 2x | ~50% |
| 5x | ~20% |
| 10x | ~10% |
| 25x | ~4% |
| 50x | ~2% |
The real liquidation price is a bit closer because of the exchange’s maintenance margin and fees; always check the liquidation price the exchange shows before opening a trade.
Funding cost: on a $10,000 position with funding of 0.01% per 8 hours, you pay $1 every 8 hours, about $3 a day. In heated markets funding can reach 0.1% per 8 hours, about $30 a day for the same position.
Habits that reduce risk
- Use a stop on every trade and place it before the liquidation price.
- Cap risk per trade: many professionals never risk more than 1-2% of the account on one trade.
- Isolated margin: with cross margin one losing position can affect the whole account; isolated margin limits the risk to that position.
- Count funding: on leveraged positions held for long, funding can quietly eat the profit.
For terms like “R” and “drawdown” used on our bot dashboard, see the Glossary.
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