Navigating the world of crypto futures requires a solid grasp of margin mechanics. This guide breaks down everything you need to know about calculating and managing margin for both isolated and cross-margin modes.
What Is Margin in Crypto Futures?
Margin is a fundamental concept in leveraged trading. In cryptocurrency futures markets, it represents the collateral required to open and maintain a leveraged position. Instead of committing the full value of a trade, you only need to deposit a fraction of the total value. This deposit acts as a financial guarantee, ensuring you can fulfill the contract's obligations.
This system allows traders to gain amplified exposure to price movements with a relatively small initial capital outlay.
How Is Margin Calculated?
Two primary margin modes are prevalent in crypto futures trading: cross margin and isolated margin. Each mode calculates required margin differently.
Cross Margin Mode
In cross margin, your entire account balance acts as collateral for all open positions. This means all available funds are considered usable margin.
Position Margin Calculation:
- Coin-Margined Contracts:
Initial Margin = (Face Value * |Number of Contracts| * Contract Multiplier) / (Mark Price * Leverage)
Note: Initial margin fluctuates with the mark price of the underlying asset. - USDT-Margined Contracts:
Initial Margin = (Face Value * |Number of Contracts| * Contract Multiplier * Mark Price) / Leverage
Note: Initial margin fluctuates with the mark price.
- Coin-Margined Contracts:
Position and Order Margin Calculation:
One-Way Position Mode:
- Long Position:
Max((Position Value + Buy Order Value), (Sell Order Value - Position Value)) / Leverage - Short Position:
Max((Buy Order Value - Position Value), (Position Value + Sell Order Value)) / Leverage
- Long Position:
- Hedge (Two-Way) Position Mode:
(|Long Position Value + Long Order Value| / Leverage) + (|Short Position Value + Short Order Value| / Leverage)
Isolated Margin Mode
In isolated margin, the collateral for each position is segregated. The profit or loss of one position does not affect the margin of another, limiting risk to the funds allocated to that specific trade.
- Coin-Margined Contracts:
Initial Margin = (Face Value * |Number of Contracts| * Contract Multiplier) / (Entry Price * Leverage)
Note: Initial margin remains fixed once the position is opened. - USDT-Margined Contracts:
Initial Margin = (Face Value * |Number of Contracts| * Contract Multiplier * Entry Price) / Leverage
Note: Initial margin remains fixed.
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The Relationship Between Margin and Leverage
Leverage is a financial tool that amplifies your trading capital, allowing you to open positions much larger than your actual account balance. Essentially, it's a loan from the exchange. While it magnifies potential profits, it equally amplifies potential losses.
The relationship is inverse: the higher the leverage, the lower the margin requirement.
Formula: Initial Margin = Position Value / Leverage
Practical Examples
Example 1: Coin-Margined Contract
- Scenario: BTC price = $10,000. You want to open a 10x leveraged long position equivalent to 1 BTC.
- Contract Details: Assume a face value of $100.
- Number of Contracts:
(1 * 10,000) / 100 = 100 contracts - Initial Margin:
(100 * 100) / (10,000 * 10) = 0.1 BTC
Example 2: USDT-Margined Contract
- Scenario: BTC price = 10,000 USDT. You want to open a 10x leveraged long position equivalent to 1 BTC.
- Contract Details: Assume a face value of 0.0001 BTC.
- Number of Contracts:
1 / 0.0001 = 10,000 contracts - Initial Margin:
(0.0001 * 10,000 * 10,000) / 10 = 1,000 USDT
Understanding Margin Ratio
The margin ratio is a critical metric that indicates the health of your position and its proximity to liquidation.
- Initial Margin Ratio: Simply
1 / Leverage. A 10x leverage has an initial margin ratio of 10%. - Maintenance Margin: This is the minimum amount of equity you must maintain in your position to keep it from being liquidated.
Maintenance Margin Ratio Formula: This ratio compares your available equity to the required maintenance margin. It varies by margin mode:
- Cross Margin (Spot & Futures):
(Full Account Balance + PnL - Sell Order Amount - Option Buy Order Requirements - Isolated Margin Requirements - All Order Fees) / (Maintenance Margin + Liquidation Fee) - Cross Margin (Multi-Collateral):
Effective Equity / (Maintenance Margin + Liquidation Fee) - Isolated Margin (Coin-Margined):
(Margin Balance + PnL) / (Face Value * |Contracts| / Mark Price * (Maintenance Margin + Liquidation Fee)) - Isolated Margin (USDT-Margined):
(Margin Balance + PnL) / (Face Value * |Contracts| * Mark Price * (Maintenance Margin + Liquidation Fee))
- Cross Margin (Spot & Futures):
A lower margin ratio signals higher risk. If it reaches 100%, liquidation occurs.
What Is Adding Margin?
Adding margin is a risk management feature exclusive to the isolated margin mode. It allows you to deposit more collateral into a specific losing position to decrease its margin ratio and avoid liquidation. This gives you direct control over your risk exposure for each individual trade.
Adjusting Leverage on Existing Positions
Many platforms allow you to adjust the leverage on an open position.
- Increasing Leverage: This reduces the margin requirement for the position. The system will permit this if the new leverage is within the allowed maximum for your position size.
- Decreasing Leverage: This increases the margin requirement for the position. The adjustment will only succeed if your account has sufficient available balance to meet the new, higher margin requirement.
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Understanding Order Potential Floating Loss
To protect users and manage platform risk, exchanges calculate the potential immediate loss of an order before it is filled. This is especially relevant for limit orders placed far from the current mark price.
If a buy order is above the mark price or a sell order is below it, the order would create an instant paper loss if executed. This "potential floating loss" is factored into the order's cost, preventing immediate liquidation upon fill.
Calculation Methods:
USDT-Margined Contracts:
- Buy Order:
Abs(Face Value * |Contracts| * Contract Multiplier * Min[0, (Mark Price - Order Price)]) - Sell Order:
Abs(Face Value * |Contracts| * Contract Multiplier * Min[0, (Order Price - Mark Price)])
- Buy Order:
Coin-Margined Contracts:
- Buy Order:
Abs(Face Value * |Contracts| * Contract Multiplier * Min[0, (1/Order Price - 1/Mark Price)]) - Sell Order:
Abs(Face Value * |Contracts| * Contract Multiplier * Min[0, (1/Mark Price - 1/Order Price)])
- Buy Order:
For market orders, the platform uses an estimated fill price for this calculation.
Frequently Asked Questions
What happens if my margin ratio hits 100%?
If your margin ratio reaches 100%, it means your available equity equals the required maintenance margin. At this point, your position will be liquidated by the exchange to prevent further losses.
Can I switch between cross and isolated margin after opening a position?
This depends on the exchange's specific functionality. Some platforms allow you to change the margin mode for a position after it is opened, while others require you to close the position and reopen it under the new mode.
Is higher leverage always better?
No. Higher leverage significantly increases risk. While it can amplify gains, it also means smaller adverse price movements can lead to liquidation. Using appropriate leverage for your risk tolerance and strategy is crucial.
What is the difference between mark price and last price?
The last price is the most recent transaction price. The mark price is a calculated fair value price, often based on an index of spot prices from major exchanges. It is used to calculate unrealized PnL and avoid liquidation due to market manipulation or low liquidity on the futures market itself.
Does adding margin guarantee my position won't be liquidated?
Adding margin lowers your margin ratio, making your position safer. However, if the market continues to move against you drastically, the position can still be liquidated if the margin ratio once again reaches 100%.
How is maintenance margin determined?
The maintenance margin rate is set by the exchange and can vary based on the asset's volatility and the leverage used. It is a percentage of the position value that must be maintained as equity.
This document is for informational purposes only. It is not intended to provide any investment, tax, or legal advice and should not be considered an offer to buy, sell, hold, or any solicitation of any service related to digital assets. Holding digital assets involves high risk and can be subject to extreme volatility, potentially resulting in a total loss of value. Leveraged trading amplifies both potential gains and potential losses and may result in the loss of your entire investment. Past performance is not indicative of future results. You should carefully consider whether trading or holding digital assets is suitable for you in light of your financial condition, especially when considering the use of leverage. You are solely responsible for your trading strategies and decisions.