Abstract

• Isolated Margin and Cross Margin are two different margin types that are offered by many cryptocurrency trading platforms.

• In isolated margin mode, investors can decide how much funds to allocate as collateral for a specific position, while the remaining account balance is not affected by the transaction.

• Cross Margin uses all available funds in your account as collateral for all trades. If one position loses money and another position makes a profit, part of the profit can be used to cover the loss, thereby extending the length of your position.

• Users should choose between isolated margin and cross margin based on their own trading strategy, risk tolerance and ideal position management activity.

What is leveraged trading?

Before introducing isolated margin and cross margin, let us briefly introduce leverage trading. Leveraged trading means that investors use funds borrowed from a trading platform or broker to buy or sell assets that exceed their own capabilities. They use their own assets in the account as collateral to borrow and invest more money in the hope of earning more.

Suppose you have $5,000 and think the price of Bitcoin will increase. You can purchase $5,000 of Bitcoin directly or borrow funds to trade using your own position. Let’s say the price of Bitcoin increases by 20%. If you invested $5,000 without using leverage, the value of your current investment would rise to $6,000 ($5,000 principal + $1,000 gain). That is, the return is 20% of the principal.

However, if you use 5:1 leverage when investing $5,000, you will borrow four times what you own Capital funds, that is, having an investment principal of US$25,000 (US$5,000 as own funds and US$20,000 as loans). Assuming the price of Bitcoin increases by 20%, the value of your $25,000 investment would now rise to $30,000 ($25,000 investment + $5,000 gain). When you repay the $20,000 loan, you have $10,000 left. That is, the gain is 100% of own capital ($5,000).

Please remember that leveraged trading is extremely risky. Let’s look at the opposite scenario, where the price of Bitcoin falls by 20%. At this point, if you had not used leverage, the value of your $5,000 investment principal would have dropped to $4,000 ($5,000 principal - $1,000 loss), a loss of 20%. But if you used 5:1 leverage, the value of your $25,000 investment would fall to $20,000 ($25,000 investment - $5,000 loss). When you repay the $20,000 loan, you will have nothing, a 100% loss.

The above simplified example does not include transaction fees or interest that may accrue on borrowed funds. In actual trading scenarios, these expenses would Reduce your profits. It is important to remember that because markets can move rapidly, potential losses may exceed even the principal amount invested.

What is isolated margin?

Isolated margin and cross margin are two different margin types that many cryptocurrency trading platforms provide. . Both models have their own benefits and risks. The following will provide an in-depth introduction to the concepts and operations of these two modes.

In the isolated margin mode, the margin amount for a specific position is limited. This means that users can decide how much funds to allocate as collateral for a specific position, while the remaining funds are not affected by the transaction.

Assume your total account balance is 10 BTC. You believe that the price of Ethereum (ETH) will increase, so you decide to open a leveraged long position in ETH. You allocate 2 BTC as isolated margin for this particular trade, with a leverage of 5:1. This means that you are actually trading with 10 BTC worth of ETH (2 BTC of own funds + 8 BTC of leveraged position).

If the price of ETH increases and you decide to close your position, any profits you earn will be credited to the funds allocated to the trade. Initial deposit of 2 BTC. But if the price of ETH drops sharply, the maximum amount you can lose is 2 BTC of isolated margin. Even if your position is forced to be liquidated, the remaining 8 BTC in your account will not be affected. This is why this model is named "isolated" margin.

What is cross margin?

Cross Margin uses all available funds in your account as collateral for all trades. If one position loses money, but another position makes a profit, part of the profit can be used to cover the loss, thereby extending the length of your position.

Let's use an example to illustrate how this works. Let's say your total account balance is 10 BTC. You decide to open a leveraged long position in ETH and a leveraged short position in another cryptocurrency, Z, in cross margin mode. You are actually trading with 4 BTC worth of ETH and 6 BTC worth of Z, both with a leverage of 2:1. Your total account balance of 10 BTC will be used as collateral for both positions.

Suppose the price of ETH falls, triggering a potential loss, but at the same time the price of Z also falls, causing your short position to make a profit. In this way, the profit from the Z transaction can be used to make up for the loss from the ETH transaction, and both positions can remain open.

However, if the price of ETH falls and the price of Z rises, you could face losses on both positions. If the loss exceeds your total account balance, both positions may be forced to close and you may lose your entire account balance of 10 BTC. This is very different from isolated margin mode, where your maximum loss is no more than the 2 BTC allocated to the corresponding trade.

Please keep in mind that the above simplified example does not include transaction fees and other costs. Furthermore, real trading scenarios are often much more complex.

The main difference between isolated margin and cross margin

From the above examples, we can clearly see the similarities and differences between isolated margin trading and cross margin trading. We can summarize their main differences in the following way:

1. Collateral and liquidation mechanisms

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In the isolated margin mode, only part of the funds are reserved for a specific transaction, and only this part of the funds is faced with Risk of Loss. This means that if you trade with 2 BTC in isolated margin mode, only those 2 BTC are at risk of being liquidated.

But in cross margin mode, all funds in your account are used as trading collateral. If a position loses money, the system can use your entire account balance to prevent the position from being liquidated. But if you have multiple trades with significant losses, you may lose your entire balance.

2. Risk Management

Isolated margin can achieve more refined risk management. You can allocate a specific amount of money you're willing to lose on each trade without affecting your remaining account balance. In contrast, cross margin combines the risk of all open positions. This model may be useful when managing multiple positions that may offset each other, but the combined risk of all positions may also mean that potential losses may be higher.

3. Flexibility

In isolated margin trading, if you wish to increase margin, you must manually add more funds to the isolated margin position. In contrast, cross margin automatically utilizes all available balances in your account, preventing any positions from being liquidated and eliminating the need for frequent maintenance margin payments.

4. Use cases

Isolated Margin is suitable for traders who want to manage risk separately, especially when the trader is highly confident about a specific trade and wants to manage risk separately. . Cross margin, on the other hand, is more suitable for traders who hold multiple positions that may be offsetting each other, or for traders who want to utilize their entire account balance without having to pay frequent maintenance margin.

Advantages and Disadvantages of Isolated Margin

Isolated Margin The advantages and disadvantages are as follows:

1. Advantages of isolated margin

Controllable risk: You decide how much money to allocate and lose on a specific position. Only that amount of money is at risk of loss; the remaining funds in your account are not affected by the potential loss on that particular transaction.

Clearer P&L: When you know the exact amount of money allocated to a single position, calculate Profit and loss on the position will be easier.

Predictability: By isolating funds, traders can predict their worst-case scenarios The maximum loss that may be faced, thereby facilitating better risk management.

2. Disadvantages of isolated margin

Close monitoring required: Since only a portion of the funds are used as collateral for the position, you may need to monitor it more closely Trade to avoid forced liquidation.

Limited Leverage: If a trade starts losing money and is close to being liquidated, you cannot automatically use it Remaining account funds are blocked. You must manually add more funds to Isolated Margin.

Higher administrative fees: Juggling multiple isolated margins for different trades can be complex, especially It is for beginners or traders managing large positions.

In summary, although isolated margin provides a controllable environment for managing leveraged trading risks, this model requires more active management. If Used incorrectly, it may limit profit potential.

Advantages and Disadvantages of Isolated Margin

The advantages and disadvantages of cross position margin are as follows:

1. The advantages of cross position margin

More flexible margin allocation: Cross margin automatically uses all available balance in the account , to avoid any open positions being forced to be liquidated, and this mode provides higher liquidity than isolated margin.

Offsetting positions: Profits and losses between positions can offset each other, which may be beneficial to hedging strategies.

Reduce the risk of forced liquidation: Cross Margin can reduce the risk of any single position being liquidated by pooling all balances. Risk of premature liquidation, as this model has a larger capital pool to meet margin requirements.

Manage multiple trades easily: Since you don’t need to adjust the margin for each trade individually, you can Simplify the process of managing multiple transactions simultaneously.

2. Disadvantages of Full Margin

The overall liquidation risk is higher: If all positions suffer losses and the total loss exceeds the total account balance , there is a risk of losing the entire account balance.

Weaker control over individual transactions: In cross margin mode, since the margin is shared among all transactions, It is therefore difficult to set a specific risk-reward ratio for a single trade.

There is a possibility of excessive leverage: Since the cross margin mode supports the use of the entire balance, trading Investors may be tempted to open larger positions than under isolated margin mode, which may result in greater losses.

Lack of clarity on risk exposure: It is difficult for traders to clearly measure overall risk exposure, especially in When there are multiple open positions with varying degrees of profit and loss.

An example of using both isolated margin and cross margin at the same time

In cryptocurrency trading, combining isolated margin and cross margin strategies is a subtle way to maximize returns and minimize risk. We illustrate how this works with an example.

We assume that you believe the price of ETH will increase due to an upcoming upgrade to Ethereum, but you also want to hedge against overall market volatility potential risks. You suspect that while ETH may rise, BTC may fall.

In this case, you might consider using isolated margin mode for a portion of the portfolio (e.g. 30%), Use this part of the funds to open a leveraged long position in ETH. This way, you limit potential losses to 30% in case ETH underperforms expectations. But if the price of ETH rises, you will make significant gains from this part of your portfolio.

For the remaining 70% of the funds in the portfolio, you can use the cross margin mode to use this part of the funds to open Short positions in BTC and long positions in Z, another altcoin. You believe that this trade will perform well no matter what direction BTC takes.

In this way, you are using the potential gains from one position to offset the potential losses from another position. If BTC falls as you predict, the resulting gains can be used to cover Z's losses, and vice versa.

After setting up these positions, you will need to continuously monitor both strategies. If ETH starts to drop, you may consider reducing your isolated margin position to limit losses. Likewise, if Z in the cross margin strategy starts to underperform significantly, you might also consider adjusting the position.

By combining isolated and cross margin, you can actively try to profit from market predictions while also hedging your risk. However, while combining these two strategies can help with risk management, it does not guarantee a profit or protect against a loss.



Conclusion

Leveraged trading has the potential to increase returns, but it is also accompanied by an equal or higher degree of risk. Users should choose between isolated margin and cross margin based on their own trading strategy, risk tolerance and ideal position management activity.

Volatility is often a top priority in cryptocurrency trading, so understand the complexities of both margin types Crucial. Traders can easily navigate the volatility in the cryptocurrency market by combining smart decision-making and diligent risk management practices. Likewise, before delving further into leveraged trading, be sure to conduct thorough research and consult a professional if possible.

Further reading

• What is leverage trading?

• What is leverage in cryptocurrency trading?

• How hedging works in the cryptocurrency field and what you need to know about seven major hedging strategies

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