Margin Trading: A double-edged sword that leverages small capital to control large positions.

Quick Overview

Margin Trading allows traders to control larger positions with relatively small amounts of capital. By borrowing funds, you can trade assets worth $1000 or more with a margin of $100. This is a double-edged sword—it can amplify gains but also accelerate losses.

In the cryptocurrency field, leverage is mainly applied in two scenarios: perpetual futures and margin trading. Mainstream coins such as Bitcoin (BTC) and Ethereum (ETH) all support leveraged trading. However, it is important to note that high leverage significantly increases the risk of being forcibly liquidated under extreme volatility.

Core Mechanism of Leverage Trading

What is leverage

Simply put, leverage allows you to use a portion of your funds to conduct larger scale trades. Suppose you have $100 but want to trade a $1000 Bitcoin position. With 10x leverage (10x or 1:10), this $100 can meet the margin requirement.

Leverage ratios are typically represented as 5x, 10x, 20x, or even higher. This number indicates how many times your trading size is compared to the margin. Some platforms even offer 100x leverage, but such extreme leverage can easily lead to liquidation.

Initial Margin and Maintenance Margin

To start leveraged trading, you first need to deposit a certain amount of funds as collateral. This money is called initial margin.

For example, if you want to go long on a $1000 Ethereum position with 10x leverage, the required initial margin is 1000÷10=$100. If you use 20x leverage, you only need $50.

But there is a catch here: The higher the leverage, the less collateral is required, but the risk of liquidation is also greater.

During market fluctuations, you need to maintain the minimum margin level, which is called maintenance margin. Once the account balance falls below this line, the platform will issue a margin call notification (Margin Call). If you do not add more, the position will be forcibly liquidated.

Simple formula:

• Initial Margin = Position Size ÷ Leverage Ratio
• Maintenance Margin = The minimum margin ratio set by the platform

Leverage Trading Case Study

Long ( Bullish ) Case

Imagine you are bullish on Bitcoin and want to go long with a $10,000 position using 10x leverage when BTC=$40,000.

• Required margin: $10,000 ÷ 10 = $1,000
• Suppose BTC rises to $48,000( increases by 20%)
• Your position value growth: $10,000 × 20% = $2,000 profit( excluding fees)
• Without leverage, an investment of $1,000 can only earn $200 . But what about the downside? If BTC drops to $32,000( and falls by 20%):
• Position loss of $2,000, which is 200% of your $1,000 principal.
• Account directly liquidated ( settlement )

Even a 10% drop could trigger a liquidation. The specific liquidation price depends on the platform's maintenance margin requirements.

Risk Warning: To avoid liquidation, it is essential to constantly monitor the margin ratio of your account. Many traders are forced to add funds or incur significant losses when their positions move against them.

short ( put ) case

Now suppose you are bearish on BTC. If you short a position of $10,000 with 10x leverage, you will need $1,000 in margin.

In margin trading mode: you can borrow 0.25 BTC( at a price of $40,000 = $10,000), and then sell.

• If BTC drops to $32,000( and falls by 20%), 0.25 BTC can be bought back for only $8,000.
• Repaying the borrowed 0.25 BTC, you profit $2,000( excluding fees)

But if BTC rises to $48,000:

• Buying back 0.25 BTC requires $12,000
• But your margin is only $1,000
• A loss of $2,000 will trigger liquidation.

Why Traders Use Leverage

1. Amplify Profits: Participate in large market movements with small capital, a 5% price change can generate a 50% profit under 10x leverage.

2. Improve Capital Efficiency: Instead of locking all funds in a high-leverage position, it's better to use low leverage to retain part of the funds for other trading, liquidity mining, or staking.

3. Flexible Market Participation: Even when bearish on an asset, profits can be made through short positions.

Risk Management in Leveraged Trading

( Core Principles

The risk of leveraged trading is proportional to the leverage multiple. With 10x leverage, a 1% price reversal can wipe out 10% of the margin. This can happen in an instant in the highly volatile cryptocurrency market.

) Methods to Reduce Risk

1. Choose a reasonable leverage multiple Newbies should not be greedy and start familiarizing themselves with the mechanism from 3x or 5x. Many platforms limit the maximum leverage for new users to protect you.

2. Use Stop Loss Order ### Stop Loss ### Set an automatic stop-loss price, which will automatically close the position and stop losses once triggered. This can protect your funds during emotional fluctuations or sudden events.

3. Use Take Profit Order ( Automatically close positions to take profits when the target profit is reached. Don't be greedy and wait for higher returns, as it may lead to losses.

4. Monitor Margin Ratio Don't wait until you are close to liquidation to check your account. Regularly monitor your maintenance margin level, and add funds or reduce your position size in advance.

5. Only use funds you can afford This is not motivational talk; it’s hard truth. Leverage trading is essentially high risk, and you should never use living expenses or essential funds for leverage.

) Where is the risk?

• Liquidation Risk: The price may suddenly fluctuate and instantly wipe out your margin.
• Slippage Risk: In extreme market conditions, the actual transaction price may deviate significantly from the expected price.
• Funding Rate: The perpetual futures will periodically charge a funding fee (Funding Rate), and there is a cost to hold positions.
• Psychological Risk: Leverage amplifies emotional fluctuations, making it easy to lead to irrational decisions.

Leverage Trading vs Spot Trading

Key Points Summary

1. Leverage amplifies everything: Profits double, losses also double. This is especially dangerous during extreme volatility in cryptocurrencies.

2. Liquidation is ruthless: When the margin falls below the maintenance level, your position will be forcibly closed, often at the worst price.

3. Adequate Margin: The initial margin is just the entry ticket; the maintenance margin is key. Do not let the account balance approach the liquidation line.

4. Stop loss and take profit are essential: This is not optional; it is a survival tool. Leveraged trading without a stop loss is gambling.

5. Choose a suitable leverage for yourself: Newbies should stick to 3-5 times, only experienced traders should consider 10-20 times. 100 times is purely looking for death.

6. Always Keep an Exit: Do not invest all your funds into one position. Have multiple positions, diversify risks, and leave some margin.

Leveraged trading is like driving a high-performance supercar - it's a powerful tool in the hands of those who know what they're doing, but it's a grave for beginners. Do your homework and manage risks to survive longer in this game.