How Does Leverage Ratio Impact the Risk of Liquidation?
The leverage ratio directly amplifies both potential returns and the risk of liquidation. A higher leverage ratio means a smaller unfavorable price movement is needed to wipe out the initial margin.
For example, a 10x leveraged position will be liquidated with a 10% move against the trader, whereas a 2x position requires a 50% move. Therefore, higher leverage drastically increases the proximity to the liquidation price and makes the position more susceptible to market volatility.
Glossar
Unfavorable Price Movement
Deviation ⎊ An unfavorable price movement within cryptocurrency, options, or derivatives markets signifies a realized loss against an anticipated directional bias, often triggering risk management protocols.
Leverage Ratio
Amplification ⎊ ⎊ Leverage ratio, within cryptocurrency and derivatives markets, represents the use of borrowed capital to increase potential exposure to an underlying asset, magnifying both prospective gains and potential losses.
Leverage Ratio Impact
Amplification ⎊ Leverage ratio impact within cryptocurrency derivatives signifies the magnified potential for both profit and loss stemming from a relatively small price movement in the underlying asset.