Dominic Kwok, co-founder of the educational platform EasyA, recently provided an in-depth explanation of how leverage functions in cryptocurrency trading, offering clarity on a topic often misunderstood by new investors.
His detailed breakdown outlined the core concept of leverage, how it amplifies both gains and losses, and why it is widely regarded as one of the riskiest trading tools in financial markets.
Leverage, as Kwok described, allows traders to borrow funds from an exchange to take on a larger position than their actual capital would otherwise permit. For instance, an investor with $100 can use leverage to control a $1,000 position at a 10x ratio.
This means that the trader contributes $100 as collateral and borrows $900 from the exchange. While the approach can significantly increase potential profits if the market moves in the trader’s favor, it equally magnifies losses if prices fall.
since many have asked, here's how leverage works:
TLDR leverage is when investors borrow money to trade, allowing them to take out larger positions than otherwise possible.
here's how (and why it's so risky):
let's say i have $100, but i want to buy more crypto than my $100… https://t.co/ARPaPBv9Yp
— Dom | EasyA (@dom_kwok) October 13, 2025
How Leverage Amplifies Gains and Losses
In his explanation, Kwok used a straightforward example to illustrate both sides of the equation. When a trader uses 10x leverage on a $100 investment, they are effectively controlling $1,000 worth of crypto assets.
If the market moves upward by 10%, the position’s value increases to $1,100. After repaying the borrowed $900, the trader pockets $200, effectively doubling their original capital.
However, the same mechanism that allows for such high returns can quickly erase the trader’s capital. If the market drops by 10%, the $1,000 position falls to $900, equaling the borrowed amount.
At that point, the exchange automatically closes the position to recover its funds, leaving the trader with a total loss of their $100 collateral. This automatic liquidation is a safeguard for exchanges to prevent borrowers from losing more than their own capital.
Clarification on Losses and Liquidation
Following Kwok’s initial breakdown, another X user known as Legendary Hamster posed a question to clarify further. They asked whether a trader would owe money to the exchange if the price of the asset continued to drop more than 10%, such as in a 20% decline scenario.
Kwok clarified that exchanges typically close out leveraged positions automatically before further losses accumulate. As soon as the asset’s value decreases enough to eliminate the trader’s margin, the position is liquidated immediately. This process ensures that traders do not go into debt and that exchanges recover the borrowed funds in full.
Kwok emphasized that this mechanism is precisely what makes leverage so risky, as even a small market movement in the wrong direction can wipe out an investor’s entire position almost instantly.
Leverage and Investor Caution
Kwok’s explanation emphasizes a key principle in financial trading: leverage should only be used by those who fully understand its implications. While it offers the potential for significant returns, it is a double-edged tool that can easily lead to complete capital loss when the market turns unexpectedly.
He pointed out that many traders underestimate how quickly leveraged positions can unravel in volatile markets, such as cryptocurrency. Because digital assets often experience sharp and unpredictable price movements, the risk of liquidation remains high even over short periods.