Leverage, exposure and liquidation: the numbers

Two numbers that get confused

Leverage is the ratio the exchange allows between position value and the margin you post. It is a setting. Exposure is the value of everything you hold divided by your equity. It is a fact about your positions. Your profit and loss come from exposure and price moves; leverage only decides how much collateral sits locked against each position.

A $10,000 account holding $3,000 of Bitcoin has 0.3× exposure. If Bitcoin falls 10%, the account loses 3%. That is true whether the account's leverage setting is 1×, 5× or 50×. The setting changes one thing: at 1× the whole $3,000 is locked as margin; at 50× only $60 is.

So a copy-trading profile that says "20×" is telling you how the trader has configured margin, not how much risk they run. The risk question is: what is their exposure, and what is their drawdown?

What a systematic book actually holds

Our strategy runs at a 5× setting, so that copied positions tie up little margin. What it holds is far smaller:

At the 5× setting that is about 6% of equity in margin on average and 20.5% at the peak; the rest sits idle. Exposure stays low because positions are sized to volatility: the ten assets have run at 50–100% annualised volatility since 2021, and a book targeting about 20% needs only a fraction of equity deployed. Research note 04 has the distribution by year.

Liquidation distance

Liquidation happens when losses reduce your margin to the exchange's maintenance requirement, typically a few percent of position value on large pairs. The distance is roughly one divided by the leverage, minus the maintenance margin rate:

Assumes a 1% maintenance margin rate on an isolated position with all margin posted at entry; exact figures depend on venue and position size.

Bitcoin has closed more than 4.5% away from the previous day on 11.5% of days since 2021, roughly one day in nine, and the altcoins more often. At 20× or above, liquidation is not a tail risk but a scheduled event. A liquidation also charges a fee on top of the loss and, in cross margin, can take other positions with it.

How a book avoids it entirely

• Keep exposure well under 1× equity. With 0.3× exposure, even a 30% crash in every position at once costs 9% of equity. Nothing is near a liquidation level.
• Place your own stop first. Our book rests an exchange-side stop 25% from entry on every position. It executes long before any liquidation price, at a price of the strategy's choosing rather than the exchange's.
• Cap concentration. No asset above 25% of equity, so one coin's stop costs at most about 6% of the account.

The result over six years of backtest: worst drawdown −18.8%, with no position ever within reach of liquidation. Bitcoin held outright drew down 77% over the same period.

If you copy

A fixed-ratio copy inherits the lead's exposure, so a low-exposure book leaves most of your margin idle most of the time. That is not inefficiency; it is the reason the drawdowns are survivable. Judge any lead trader by drawdown and exposure, never by the leverage figure on the profile.