Recently, as the crypto space sees drastic, frequent rises and falls, investors have been depressed. Facing a market that is still fluctuating, many investors worry about the market conditions, and some plan to try out contracts because they are known as profit-makers even in a bear market. However, investors are often confused when they first open a contract webpage. Unlike the straightforward operations of spot trading like buy/sell, contract trading comes with plenty of new terms.
Today, we will offer contract beginners an introduction to the two most fundamental and also the most important terms — leverage & margin rate. Let us first focus on what the terms mean. Both terms are common in derivatives trading.
What we normally call leverage refers to the multiplication of the profit/loss concerning one’s contract account. For instance, the picture shows terms such as “100x” and “50x” behind each pair, which indicates that the highest leverage allowed for a given trading pair. As different assets come with varying risks, trading pairs on various exchanges also differ in terms of their leverage. For instance, on CoinEx, the maximal leverage of BTCUSDT and ETHUSD is 100x, while trading pairs like BCHUSDT and AAVEUSDT feature a leverage rate of up to 50x. Here, the rate is not simply based on the leverage of the open value. Instead, the leverage rate = open value/the value of all assets.
In contract trading, a certain deposit is required, which is referred to as the margin. Moreover, it also involves several other concepts. For instance, the initial margin refers to the minimum margin required for opening a position. Initial Margin = Open Value/Leverage. Position margin indicates the asset amount locked for the position. Under isolated margin, users could add or reduce the position margin manually; under cross margin, the margin will be automatically added using assets from the available balance when the position margin falls below the maintenance margin.
What we refer to as the margin rate is the ratio of the margin to the open value.
Under isolated margin: Margin Rate = (Position Margin)/Open Value
Under cross margin: Margin Rate = (Available Margin + Position Margin)/Open Value
Here’s a hypothetical case:
Suppose that the BTCUSDT pair is now priced at 40,000 USDT and that you decided to go long on the pair in the belief that the BTC price will rise in the future, you then took 4,000 USDT from your 10,000 USDT balance to buy the BTCUSDT contract with the leverage of 10x. At this point, your 4,000 USDT is multiplied by 10 times, which means that the open value now stands at 40,000 USDT. The position margin would be 4,000 USDT, while the remaining 6,000 USDT would be your available margin.
In this case, Leverage = 40,000/10,000 = 4x
If you adopted isolated margin, your Initial Margin Rate = 4,000/40,000=10%
If you went with cross margin, then the Initial Margin Rate = (4,000+6,000)/40,000=25%
This has been the introduction to the margin rate and leverage. If you are new to contracts, we recommend setting low leverage and high margin rates to minimize the risk of forced liquidation.