Recently, someone asked about coin-margined contracts, so I’ll share my understanding.

In simple terms, coin-margined contracts use coins as collateral, and profits and losses are also calculated in coins. This is different from U-margin contracts, which use U as collateral and denominate everything in U. At first glance, there’s not much difference, but in reality, the differences are significant.

I’ve noticed that many people overlook one point: coin-margined contracts inherently have a 1x long attribute. Think about it—if you first buy coins with U for spot trading, then open a coin-margined contract, the price fluctuations of the coin directly affect your spot holdings, which is essentially a long position. Because of this characteristic, a 1x short coin-margined contract is actually zero leverage and will never liquidate. When the coin price drops, you get more coins; when it rises, you lose coins, but your total market value remains unchanged.

Here’s a very interesting arbitrage opportunity. For example, you buy $100,000 worth of BTC spot, then open a 1x coin-margined short contract. No matter how the coin price fluctuates, your total market value stays at $100,000. The clever part is that most of the time, Bitcoin contract funding rates are positive, so short positions can earn funding fees, which can amount to about 7% annual return. This is called risk-free arbitrage—you can beat most retail investors just by doing this.

Now, let’s talk about the collateral mechanism of coin-margined contracts. Collateral is paid in coins, but the calculation is based on the U value at the time of opening the position. This means that fluctuations in the coin price do not directly affect your collateral or liquidation price.

Considering the inherent long attribute of coin-margined contracts, a 1x long position will be liquidated if the coin price drops by 50%. Suppose you buy 10,000 coins with $10,000; if the price drops nearly 50%, you need to add more collateral. At this point, with $10,000, you can buy 20,000 coins, and adding these will prevent liquidation forever. The key is that when the price is low, you buy more coins with the same U to top up collateral. When the price rebounds, these additional coins generate profits. Originally, 10,000 coins losing 50% would mean a $5,000 loss, but after topping up collateral, you hold 30,000 coins. As long as the price returns to 67% of the opening price, you break even.

Looking at 3x short positions, a 50% rise in price will trigger liquidation. Suppose you initially buy 20,000 coins with $20,000, then open a 3x short with 10,000 coins. When the price rises 50% and approaches liquidation, you can use the previously reserved 10,000 coins to top up. The benefit is that the price has increased, so those 10,000 coins are now worth 15,000 U, but you only need to add coins worth 10,000 U to push the liquidation price up by a factor of two. If you use all 10,000 coins as collateral, the liquidation price will be much safer compared to U-margin contracts.

Overall, the advantage of coin-margined contracts is based on low leverage. My suggestion is to stick to 1x to 3x leverage—don’t try for high leverage.