The Truth of Margin Trading in the Crypto Assets Market

Core Points

• Leverage allows traders to control larger positions with less capital, making it a double-edged sword of high risk and high reward.
• In the cryptocurrency field, leverage is mainly applied in two modes: perpetual futures and margin trading.
• Understanding the principle of leverage is crucial - if you play without knowing, there's a 90% chance of liquidation.
• Risk management is more decisive for success or failure than the choice of leverage multiplier itself.

What is leverage?

In simple terms, leverage is borrowing money from the exchange to increase your position size. If you deposit $100 in your account, you can trade $1,000 using 10x leverage. This multiple relationship is usually expressed as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:100 (100x).

Some exchanges in the market even allow for 100x leverage, which means your principal can be magnified by 100 times. For example, if you want to take a position of $1000 in Bitcoin (BTC), but you only have $100 in your account, you can meet the requirement with 10x leverage.

It is worth noting that the borrowed funds do not come from nowhere—you need to provide a certain proportion of the principal as collateral (i.e., margin). This collateral determines the size of the position you can operate.

Two Main Types of Leverage Trading

In the cryptocurrency market, leveraged trading is mainly divided into two categories: perpetual futures contracts and margin trading.

In perpetual futures contracts, leverage is implicitly designed into the contract. After selecting a multiple, you can go long or short directly without needing to actually borrow the assets.

Margin trading is more straightforward – you borrow a certain cryptocurrency (for example, borrowing 0.25 Bitcoin) from the exchange and then sell it. If the price drops, you can buy it back at a lower price, return it to the exchange, and the remainder is your profit.

Two Key Concepts of Margin

Initial Margin

To open a position, you first need to freeze a certain amount of funds as collateral. This is called initial margin. Its size depends on the leverage multiple and the size of the position you choose.

For example: If you go long on Ethereum (ETH) with $1000 using 10x leverage, the initial margin would be $1000 ÷ 10 = $100. If you change to 20x leverage, the initial margin drops to $50.

It sounds very cost-effective, but here comes the problem - the higher the leverage, the greater the risk of liquidation. With even a slight price fluctuation, your position could be forcibly closed.

Maintain Margin

After opening a position, you need to maintain a minimum margin level. If the market moves against you and the margin balance falls below this threshold, the exchange will require you to add margin, otherwise, it will directly liquidate your position.

Simply put: Initial Margin is the ticket to open a position, and Maintenance Margin is the bottom line to maintain a position.

Practical Case: Understanding the Power and Risks of Leverage

Example of a long position

Assuming the current price of BTC is 40,000 USD and you are bullish. Using 10x leverage to open a long position of 10,000 USD only requires freezing 1,000 USD as margin.

If the market meets expectations: BTC rises to $48,000 (a 20% increase). Your position makes a profit of $2,000. Compared to the $200 you could earn without leverage, the profit has increased tenfold.

If the market reverses: BTC falls to $32,000 (a 20% drop). Your position loses $2,000. However, your margin is only $1,000, and your account has been wiped out. Worse still, if the price drops by just 10%, the liquidation mechanism on some exchanges has already been triggered.

To survive, you can only add margin. However, many newcomers are completely unaware of this, and by the time they receive a margin call, it is already too late.

Example of a short position

This time, let's change the perspective. The current price of BTC is 40,000 USD, and you are bearish. You can borrow 0.25 BTC (worth 10,000 USD) from the exchange and then sell.

If BTC drops to $32,000, 0.25 BTC can be bought back for only $8,000, returned to the exchange, netting a profit of $2,000.

But what if BTC rises to $48,000 instead? Now it takes $12,000 to buy back 0.25 BTC. The original $1,000 margin is simply not enough to cover this difference. In the end, it still results in a liquidation.

Why Traders Choose Leverage

Expanding profit potential is the most direct reason. With the same principal, leverage allows you to participate in larger trades, naturally increasing the profit margin.

Optimizing capital allocation is also a consideration. Instead of locking all funds in one exchange for 2x leverage, it is better to use 4x leverage to open smaller positions and use the remaining funds for other activities—such as participating in DeFi liquidity mining or staking tokens.

But to be honest, these reasons don't sound that important; once the account is liquidated, everything becomes a bubble.

Risk Control in Margin Trading

Choose a reasonable leverage multiplier

High leverage may seem attractive, but the risks grow exponentially. With 10x leverage, a 1% price fluctuation results in a 10% loss of your principal. With 100x leverage, even a 0.1% fluctuation can be deadly.

Most exchanges limit the maximum leverage for newcomers, not to torment you, but for your protection. If you are a beginner, sticking to a leverage of 3 to 5 times will be safer.

Fully utilize stop-loss and take-profit

Stop Loss can automatically close positions when the market moves against you, preventing unlimited losses.

Take Profit orders automatically close positions when the expected profit is reached, avoiding losses due to greed.

These two tools may seem simple, but they can save your account. Unfortunately, many traders do not use these protective measures due to laziness or a sense of luck.

Continuous monitoring of account status

It is crucial to maintain the margin balance above the warning line. The exchange will issue a warning before liquidation, but you cannot rely solely on the system to remind you; you need to always pay attention to your position status.

Market fluctuations are unpredictable, especially in the cryptocurrency market. Once leveraged trading is initiated, it can change outcomes in just a few minutes. Active monitoring is always safer than passive handling.

Final Words

Leverage is a sharp knife; if used well, it can significantly increase profits, but if used poorly, it can lead to total loss. The key is not in the leverage itself, but in whether you truly understand it and respect it.

When trading cryptocurrencies, always remember - only use funds that you can afford to lose. If you're not completely sure, don't use high leverage. The market will always be there, opportunities won't run away, but if your principal runs away, everything is over.

Systemic risk, market risk, operational risk, and leveraged trading magnifies all of these. Before placing your first real money bet, spend more time learning and practicing in simulations; this is not a waste, but a necessary homework.