Mistake #5 – High Leverage

Leverage

There are two common opinions: “Leverage is good — you can earn a lot,” and “Leverage is evil — you can lose everything.” Both statements are true.

Leverage: A Tool or a Trap?

Leverage is the use of borrowed funds from the exchange to open positions larger than your actual balance. For example, with $1,000 and 10x leverage, you can open a $10,000 position.

On one hand, this increases capital efficiency, since you can deploy more funds in arbitrage setups than you physically have.

On the other hand, the higher the leverage, the closer the liquidation price is to your entry price. Even a small price movement can wipe out your position.

Why High Leverage Is NOT Recommended in Arbitrage

Arbitrage, by nature, is a low-risk strategy that extracts profit from market inefficiencies. Leverage turns arbitrage into a high-risk game.

Desynchronization Risk and Liquidation of One Side

In arbitrage (for example, Spot–Futures), you open two positions: one buy and one sell. They hedge each other.

• Problem: If the price suddenly spikes upward, your futures position (Short) goes into loss. With high leverage, this position can be liquidated.

• Result: You are left with a “naked” spot position that may rapidly lose value. The arbitrage trade turns into a large loss.

Fee Mathematics

Beginners often forget that fees are charged based on trade volume.

• Your deposit: $1,000. Spread: 1%.

• You enter with 20x leverage (position size $20,000).

• Entry and exit fees (~0.1% total) equal $20.

• Your expected profit ($200) can easily disappear due to slippage and funding, while the fixed cost of fees remains.

Volatility and “Squeezes”

The crypto market is known for sharp wicks on charts (squeezes). The price may spike 5% for a second and then return. Without leverage, you might not even notice it — but with 20x leverage, your position could be instantly liquidated by the exchange.