Borrowed conviction: how leverage amplifies everything
Leverage lets a trader control a position larger than the cash they've actually put up, by borrowing the rest. In crypto, this is often done through perpetual futures — contracts that let traders bet on price direction with borrowed size and no expiration date. Leverage doesn't change which direction a market moves, but it dramatically changes how far price swings once it starts moving, because leveraged positions carry a built-in breaking point: if price moves against the position enough, the exchange automatically closes it to prevent the trader's losses from exceeding what they put up. That automatic closure is called a liquidation.
Perpetual futures also use a mechanism called the funding rate, a periodic payment between traders holding long positions (betting price rises) and short positions (betting price falls), designed to keep the futures price tethered to the actual spot price. When funding is heavily skewed — say, strongly positive because far more traders are leveraged long than short — it's a signal that the market has become lopsided and crowded on one side, which sets the stage for the next section's dynamic.