What leverage does to one strategy: 1x, 2x, 3x, 5x

Leverage multiplies a position, so the intuition is that it multiplies the result: twice the return, twice the drawdown. On a perpetual future, over a few years, that is not what happened. One textbook strategy, run unchanged at four leverage levels, went from a modest profit to almost nothing left — and the run without funding shows why.

Setup

• Strategy: the classic golden cross — long while the daily 50-day simple moving average is above the 200-day one, flat after the death cross. The same rule as the golden cross study, not tuned here.
• Market: Binance USDT-M perpetuals BTCUSDT and ETHUSDT, 4h bars, 2021-01-01 → 2026-10-01.
• Sizing: every entry puts 95% of the account up as isolated margin; the position is that margin times the leverage. Leverage 1x, 2x, 3x and 5x — eight runs, nothing else changed.
• Costs: 0.05% fee and 0.05% slippage per side, fills at the next bar's open, funding charged and paid every 8 hours.
• For comparison: holding the coin over the same window, as each run's report shows it — +185.73% for BTC and +261.34% for ETH.

The results

Doubling the leverage did not double anything useful. At 2x neither coin was ever liquidated, and both still lost money: the drawdown deepened to 88.33% and 96.84%, and the funding bill roughly doubled with the position. From 3x up, the first liquidation took almost the whole account, and the strategy went on trading the same signals with what was left.

Backtest

Golden cross 50/200 daily — leverage study

BTCUSDT · 4h · Futures · 2021-01-01 → 2026-10-01

Return

+9.78%

Max drawdown

67.93%

Sharpe

0.26

Win rate

57.1%

Trades

7

Open the report →

Backtest

Golden cross 50/200 daily — leverage study

BTCUSDT · 4h · Futures · 2021-01-01 → 2026-10-01

Return

-99.77%

Max drawdown

99.99%

Sharpe

0.60

Win rate

44.4%

Trades

9

Open the report →

Backtest

Golden cross 50/200 daily — leverage study

ETHUSDT · 4h · Futures · 2021-01-01 → 2026-10-01

Return

+63.56%

Max drawdown

73.90%

Sharpe

0.46

Win rate

71.4%

Trades

7

Open the report →

Backtest

Golden cross 50/200 daily — leverage study

ETHUSDT · 4h · Futures · 2021-01-01 → 2026-10-01

Return

-99.63%

Max drawdown

100.00%

Sharpe

0.51

Win rate

50.0%

Trades

10

Open the report →

A 3x long liquidated above its entry price

The first BTC trade opened on 2021-01-01 at 29,317 and stayed long through the 2021 rally. At 3x without funding its liquidation price was 19,662 — a third below entry. With funding it was liquidated on 2021-05-19 at 30,798, above the price it was bought at. Between those two dates BTC funding averaged 0.0554% per 8 hours — more than five times its 0.0098% average over the whole 2021–2026 window — and was above 0.05% at 44.8% of settlements¹. On a position whose value rose with the rally, that came to 10,846 USDT — more than the trade's whole 9,505 USDT margin. At 5x the same trade paid 18,077 USDT and was liquidated the same day at 34,705.

The mechanism is isolated margin. A long's funding payments are taken out of the margin that holds the position open; less margin means a smaller loss is enough to hit maintenance, so the liquidation price climbs a little at every settlement. Over five months of hot funding it climbed past the entry. Even the 1x run felt it: its first trade gained 21% on price (29,317 → 35,505) and still closed at a loss of 1,683 USDT, because it paid 3,679 USDT of funding.

Switch funding off and the same 3x strategy does something else entirely — never liquidated, +359.94%. That run is not achievable on a perpetual; it only isolates how much of the damage was funding rather than price:

Backtest

Golden cross 50/200 daily — leverage study

BTCUSDT · 4h · Futures · 2021-01-01 → 2026-10-01

Return

+359.94%

Max drawdown

85.38%

Sharpe

0.74

Win rate

71.4%

Trades

7

Open the report →

Sharpe barely noticed

The metrics guide separates shape metrics — Sharpe, Sortino, profit factor, which describe how a strategy trades — from scale metrics — return and drawdown, which grow with the bet size. Here the split shows up in its sharpest form. Sharpe stayed between 0.26 and 0.60 on BTC and between 0.38 and 0.51 on ETH while the return went from a profit to -99%; the 5x BTC run even has the highest Sharpe of the four. Sharpe is an average of daily returns over their spread, and leverage scales both by the same factor — it does not see that the compounded path ran into a liquidation.

Profit factor is a sum of money, so it depends on when the losses came. On BTC the liquidation came first, on a full account, and the later winners were tiny — profit factor fell to 0.08 and 0.01. On ETH the big winner (2021) came before the liquidation, so from 2x up profit factor stayed between 0.84 and 0.92 while the account was emptied.

The practical reading: judge the rule by its shape at 1x, then choose the leverage from the drawdown and from where the liquidation price can drift — not from the Sharpe, which will look the same at every leverage right up to zero.

Conclusion

• The same golden cross went from +9.78% (1x) to -99.77% (5x) on BTC and from +63.56% to -99.63% on ETH, 2021–2026. Even 2x, never liquidated, lost money on both coins.
• On a perpetual, leverage multiplies funding as well as price. Under isolated margin funding drains the margin, so a long held through hot funding gets a rising liquidation price — at 3x on BTC it overtook the entry.
• Sharpe stayed in the same band at every leverage; drawdown and return did not. Use the shape metrics to judge the rule and the scale metrics to judge the bet.

More research: funding as a signal and how to backtest a crypto strategy.

Notes

1. Computed from Binance's public USDT-M funding-rate history for BTCUSDT (415 settlements from 2021-01-01 to 2021-05-19). The backtest's funding on this trade matches a replay of those rates to the cent. ↩