Introduction to Contract Trading #黄金白银再创新高 Understand the Four Core Concepts and Avoid Liquidation Risks

Why do you feel afraid whenever you hear “contract”?

Many people’s first encounter with cryptocurrency contract trading is often like this: hearing that someone got rich overnight, they rush in, and not long after, their account is “zeroed out.” Where is the problem? Often, it’s not because they don’t know how to analyze the market, but because they don’t understand the most basic rules of the game.

Today, in just three minutes, we will help you thoroughly clarify the four core concepts of contract trading: Margin, Leverage, Liquidation, and Funding Rate. Understanding these is your first step to surviving in this high-risk market.

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Concept 1: Margin — Your “Entry Deposit”

Simply put: Margin is the principal you invest when opening a position, similar to a “bet” in card games or a “deposit” when renting a house.

It determines:
· How large a position you can open
· How much market fluctuation you can withstand
· The last line of defense for all your risks

Key understanding: This money is your real funds invested, and profits or losses caused by market fluctuations first increase or decrease from here.

Concept 2: Leverage — A Sharp “Double-Edged Sword”

One-sentence definition: Leverage is a financial tool that amplifies your trading capital, allowing you to operate larger positions with a smaller principal, achieving “small investment for big gains.”

How does it work? Two examples make it clear:

· Example A (10x leverage):
You invest 100U margin, using 10x leverage.
→ Your operable position becomes: 100U × 10 = 1000U
· Price rises 1%: You earn 1000U × 1% = 10U (10% return on principal)
· Price drops 1%: You lose 1000U × 1% = 10U (10% loss on principal)
Key point: The price needs to drop 10% for your 100U principal to be wiped out (liquidation).
· Example B (50x leverage):
Same 100U margin, but using 50x leverage.
→ Your operable position becomes: 100U × 50 = 5000U
· Price rises 1%: You earn 5000U × 1% = 50U (50% return on principal)
· Price drops 1%: You lose 5000U × 1% = 50U (50% loss on principal)
Key point: A mere 2% price decline will wipe out your 100U principal (liquidation).

Leverage’s Lesson:

The higher the leverage, the greater the fluctuations in profit and loss, and the risk of liquidation increases exponentially. It’s like stepping on the accelerator in a car—you can reach your destination faster, but it’s easier to lose control and crash.

Concept 3: Liquidation Price — The “Red Line” You Must Not Cross

What is it: The liquidation price, commonly called the “liquidation line,” is the price at which your margin ratio drops to the minimum maintenance margin level set by the exchange.

What does it mean:
Once the market price reaches or crosses your liquidation price, the exchange system will forcibly close all your positions. At this point, your margin is likely to be nearly exhausted or even wiped out completely.

Why is it the most dangerous?
Because liquidation is an automatic, irreversible process. In extreme volatility, you may not have time to add margin, watching your position be instantly cleared, rendering all previous analysis and patience useless. High leverage is the primary reason that makes the liquidation price easier to reach.

Concept 4: Funding Rate — The “Balancer” of Perpetual Contracts

Why does this exist?
Our traded “perpetual contracts” have no expiration date. Without a mechanism, the contract price could deviate significantly from the spot price over time. The funding rate is designed to address this issue.

How does it work?

· Essentially: It’s a periodic (usually every 8 hours) payment exchanged between long and short traders.
· Direction:
· When the funding rate is positive, longs pay shorts (usually indicating overheated bullish sentiment, encouraging some to short).
· When the funding rate is negative, shorts pay longs (usually indicating excessive bearish sentiment, encouraging some to go long).
· Purpose: To keep the contract price anchored close to the spot price and prevent excessive deviation.

Impact on you:
If you are a long-term holder, the funding rate becomes part of your profit (if you receive it) or cost (if you pay). Although the amount per instance isn’t large, long-term accumulation can’t be ignored.

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Summary and Risk Warning

Let’s review these four concepts with a table:

| Concept | What it is | Core Function | Main Risk |
|---------------|----------------------------------|----------------------------------------------|--------------------------------------------------------|
| Margin | Your invested principal | The starting point and risk-bearing basis | Total loss possibility |
| Leverage | Multiplier of position size | Amplifies gains, enables “small bet for big win” | Proportionally amplifies losses, high leverage easily leads to liquidation |
| Liquidation Price | Price trigger for forced close | Risk control mechanism by the exchange | Positions are automatically liquidated, principal wiped out |
| Funding Rate | Fees exchanged between longs and shorts | Keeps perpetual contract price close to spot | Increases holding costs or slightly affects final returns |

Final Advice

Contract trading is not gambling; it’s a financial activity that requires extreme calmness, discipline, and knowledge. Before pressing the “Open Position” button, ask yourself three questions:

1. Do I fully understand the mathematical relationship between margin and leverage?
2. Where is my liquidation price, and is market volatility likely to reach it easily?
3. How much reverse fluctuation can my position withstand?

Always remember: surviving in this market is more important than getting rich overnight. Understanding these basic concepts is the first and most crucial step to “putting on your seatbelt” for your own trading safety.

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Interactive Topic: Among these four risks, which do you think is the most dangerous for beginners? Why? Feel free to share your thoughts. $BTC ‌$SOL ‌$ETH ‌