What is Crypto Margin Trading? Margin Trading Explained in Small Steps

Recently, Bybit launched the Cross Margin feature. It is used is a preventable measure against liquidation when a user takes a position in margin trading. But what is crypto margin trading, and what are the main terminologies to know?

What is Crypto Margin Trading?

What is margin trading?

Margin trading is the concept of a trader using borrowed funds from an exchange to trade a financial asset. It is popular among traders because of its flexibility and the possibility of winning big whilst using relatively low amounts of capital.

What are the main terminologies of margin trading?

Leverage: The funds which you borrow from the exchange is called leverage. On Bybit, you can use up to 100x leverage. The larger amount of leverage used, the higher potentially the profits can be.

Initial Margin: This is the amount of funds required to open a position when margin trading.

For example: If you opened a position for 100 USD, and you use 100x leverage, you would be able to trade a contract value of 10,000 USD.

The amount of initial margin required depends on the leverage used, and the higher leverage a trader uses, the lower margin that is required.

To find out how initial margin is calculated, please click here.

Used Margin: This is the total margin needed to open positions when placing an order in the ‘Order Confirmation’ window and ‘Assets’ tab, and is calculated by adding the initial margin to a two way taker’s fee.

Maintenance Margin: This is the minimum amount of funds required to keep a position open when trading. The base value is 0.5% for BTC, and 1% for ETH, EOS and XRP, of the value of the position taken. As with initial margin, the level of maintenance margin required increases as the amount of maximum possible leverage decreases.

Referring again to the above example, if a BTC position is taken with an initial margin of 100USD and 100x leverage, with the contract value of 10,000 USD, the maintenance margin is 10,000 x 0.5% = 50 USD. Therefore, if the position falls to 9950 USD in value, then the position will be liquidated.  

For details of how maintenance margin is calculated, please click here.

Risk Limit: Checking the risk limit can tell you the initial margin and maintenance margin required, and the maximum leverage you can use, for a position. Risk limit is used to reduce the possibility of liquidation in large positions.

To check the risk limit for different positions, please click here.

Margin trading in crypto compared

Bybit is a cryptocurrency derivatives exchange offering perpetual contracts. They are identical to futures contracts with the only difference being that they have no expiry date. One of the advantages of offering perpetual contracts is that they offer up to 100x leverage. In the regular spot margin market, 3-5x leverage is commonplace, with borrowing costs often being high. For regular futures contracts, 5-20x leverage is normally offered on exchanges.

The upside and possible downside of margin trading

As already referred to, the advantage of margin trading on Bybit is the possibility of being able to use up to 100x leverage on positions, and therefore possibly making significant gains whilst using relatively small amounts of funds.

However, on the flipside, comes risks. If the market goes against the way you expect, you could be quickly liquidated, especially if using a large amount of leverage. As crypto markets are notoriously volatile, it is recommended to approach margin trading with caution and have a well-grounded knowledge of trading and risk management before you take out highly leveraged positions.

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