How Can High Leverage Amplify Losses When the Perpetual and Spot Prices Diverge?
High leverage magnifies the financial impact of price movements on a trader's collateral. When the perpetual price diverges from the spot price, it can move sharply against a leveraged position.
Because the position's value is artificially inflated by leverage, even a small percentage change in the contract price can wipe out the trader's entire initial margin, triggering a forced liquidation. This means the exchange automatically closes the position to prevent further losses, resulting in a total loss of the trader's collateral.
