What is Cross Margin and Isolated Margin?

Ann has an account balance of 3 BTC. She uses 1 BTC as the initial margin and enters 50,000 BTCUSD short position at $8,000.

Scenario 1: As the price of BTC rises, Ann loses 1 BTC of margin and the position is liquidated. Ann believes that the market is still bullish and does not foresee a downturn in the short term. Therefore, she chooses to leave the market immediately after losing the 1BTC initial margin.

In this case, Ann should select the Isolated Margin mode.

Scenario 2: As the price of BTC rises, Ann believes it’s overbought and expects a downturn soon. Ann may be losing 1 BTC or more tentatively, but she wishes to keep her short position.

In this case, Ann should select the Cross Margin mode. All available margin (3 BTC) in the account can be utilized by this position until it’s 100% consumed.

Isolated Margin vs. Cross Margin

Let’s find out more details of differences.

Isolated Margin

Under the Isolated Margin mode, the available margin for a position is fixed. The margin that the position can lose is limited to the initial margin allocated to this position. The position gets liquidated when the initial margin drains up, but the remaining available margin will not be drawn to cover the loss. In other words, the maximum loss for an isolated margin position is the initial margin. 

You may append extra margin to the isolated position for a better liquidation price while you may lose the extra margin as well.

The Isolated Margin mode is not commonly offered by equity or foreign exchange brokers, but widely adopted by cryptocurrency trading platforms. This is due to the significant volatility of cryptocurrencies. Some less liquid crypto pairs may even experience “pump and dump”. Isolated position strictly limits the position loss to the initial margin. In a black swan event with a huge price jump or fall, all the preset stop loss price level may be skipped and missed, and isolated margin is the last resort to protect traders’ wallet balance and other position.

Cross Margin

Under the Cross Margin mode, a position reserves initial margin per the minimum initial margin requirement. For example, the BTCUSD contract usually reserves only 1% initial margin upon position entry. However, if the cross margin position experiences loss, all the available balance of the trader’s account (of the same coin type) will be drawn automatically to protect the position. In other words, the maximum loss of a cross margin position can be the sum of its initial margin and account available balance.

As a cross margin position can utilize all available margin in the account, a pre-set leverage doesn’t make sense. The effective leverage of a cross margin position is determined by the position size and the available margin for this position. Take Ann’s scenario for instance, while it only reserves 1% of initial margin to enter the 50,000 short position, 100x initial leverage,  the actual effective leverage is only 2.125x, calculated as the position size of 6.25BTC (50,000/8,000) divided by 3 BTC (account balance).

Under the Cross Margin mode of Bybit’s USDT contract, the unrealized profit of cross margin positions will also be released to the said account’s available balance in real-time.

The Cross Margin mode is suitable for long-term holdings and arbitrage strategies to sustain a position and to protect it from wipe out by short-term fluctuations.

Let’s look at another scenario:

Eric has 2 BTC in his account and he uses the full amount as initial margin to long 32,000 BTCUSD contract at $8,000 (2x leverage).  The price of BTC continues to rise to $10,000. He intends to increase another 10,000 long position. What will be the difference between the two modes in this scenario?

Isolated Margin Mode: Since Eric has used up his 2 BTC as initial margin for the first position, there is no capacity for an extra position.He has to raise the leverage to release some funds.

Cross Margin Mode: The first 32,000 contracts reserve only 0.02 BTC (1%) as initial margin, and Eric has sufficient margin to raise his positions.

What are the advantages/disadvantages of both modes?

Isolated Margin

 ✓ When the position gets liquidated, only the initial margin (and the margin replenished by the user) preset by the user will be lost. The rest of the available margin in the account is well protected.

✗ Traders will not be able to increase their position if all margin has been reserved.

✗ Isolated positions with high leverage will be prone to liquidation risk.

Cross Margin

✓ Lower liquidation risk.

✓ Low initial margin requirement (e.g. 1%) and more flexibility to increase positions.

✗ All funds can be lost under severe market movements.

Choose the appropriate margin mode to fit  your trading strategy and risk management purpose.

Is it possible to switch modes when holding positions?

Bybit allows traders to switch between isolated margin and cross margin while holding an active position. Just be reminded that if you hold hedged positions of a USDT contract, you can’t switch from cross margin to isolated margin.