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Bitget Beginner's Guide — Introduction to Margin Mode

Bitget Beginner's Guide — Introduction to Margin Mode

Beginner
2024-05-17 | 10m

Overview

- This article aims to introduce the definitions and concepts related to margin in futures trading, and how to effectively utilize margin to engage in the cryptocurrency market;

- It also discusses and analyzes the risks associated with cryptocurrency margin trading;

- The pros and cons of margin trading.

When discussing futures trading in cryptocurrencies, the primary benefit is the amplification of an investor's purchasing power, fundamentally driven by the margin system. This system enables investors to trade with borrowed funds, often enabling them to acquire more assets than their cash accounts would permit. Because of the relatively high value of these trade positions, investors can achieve profits many times over their principal if they accurately predict market movements. Consequently, the introduction of margin trading has dramatically enhanced activity in cryptocurrency investments, making it one of the most sought-after products in the industry.

What Is Margin Trading?

Margin trading is undoubtedly one of the most significant innovations in the derivatives industry. Trading platforms rely on margin systems to ensure that both parties in a derivative futures can fulfill their obligations.

So, how does this mechanism work? Requirements for margin can vary slightly across different trading platforms. For example, at Bitget, investors deposit a small portion of assets into their margin accounts and then have the opportunity to borrow funds, usually from the trading platform, which greatly enhances their purchasing power. Thus, margin is closely related to margin trading. For more details, refer to Bitget Coin-M Futures Leverage and Risk Management.

Margin trading requires investors to re-evaluate their positions daily: those whose account balance falls below the required level must promptly top up their funds; otherwise, the trading platform will close their open positions until the account balance meets the minimum value. Additionally, investors can choose to exit positions they no longer wish to hold instead of depositing more funds.

Having clarified these concepts, let us explore some of the terms and processes involved in margin trading to better understand its mechanisms.

How Does Margin Trading Work?

Initial Margin

In cryptocurrency margin trading, investors must initially provide Bitget with a certain amount of margin, typically a small percentage of the cryptocurrency amount being traded, such as 10% or 20%—this is known as the initial margin. The initial margin represents the minimum amount required to execute the investor's requested positions. Essentially, the initial margin is directly related to the leverage of the position. For example, if you choose a leverage of 20x, your initial margin would need to be 5% of the total position amount. The larger the position, the lower the leverage and the higher the initial margin required. This arrangement allows investors to trade on a much larger scale than the actual quantity of cryptocurrencies they possess.

For instance, if an investor wishes to engage in margin trading with 10 Bitcoins and selects a leverage of 10x, they would only need to provide 1 Bitcoin as margin to trade at the scale of 10 Bitcoins. This type of leveraged loan effectively magnifies the investor's capital, thereby enhancing their ability to capitalize on market fluctuations for profit.

Maintenance Margin

Maintenance margin is the total amount of funds required in an investor's account to maintain leveraged positions. It typically fluctuates based on the price differences of the relevant cryptocurrencies. Maintaining an adequate level of funds in the account is crucial for keeping positions open. Otherwise, investors will soon receive a notification from the trading platform, informing them that their leveraged positions may be at risk. This unwelcome message, known as margin call, signals that the investor's margin trading activities might soon be liquidated. At times, if the maintenance margin levels are not met, investors may be forced to liquidate their entire leveraged position.

Maintenance margin for each position = maintenance margin rate × position value calculated at the current reasonable mark price. The transaction fees required to close a position (taker fees) are also included in the maintenance margin. This is the minimum margin necessary to maintain a position, and if the account balance falls below this threshold, the position will be liquidated.

Details: Margin Overview

Margin Mode In Futures Trading

Now that we are familiar with the general aspects of margin trading, let's delve into the two most common margin modes in Bitget Futures Trading : cross margin and isolated margin. These two options are essentially two sides of the same coin, offering both conservative and high-risk strategies for investors.

Bitget Beginner's Guide — Introduction to Margin Mode image 0

Isolated Margin Mode

Isolated margin is a strategy that poses relatively lower risks without jeopardizing an investor's valuable assets. This approach allows investors to open a position that is completely isolated from other accounts. In an isolated margin position, whatever happens, will not affect the remainder of the investor's portfolio.

A good isolated margin example is venturing into a new cryptocurrency or betting on a high-risk price variance in the market. In both scenarios, Bitget advises that it is wise not to put all your eggs in one basket. Using an isolated margin account gives investors the opportunity to take this risk and obtain the needed leverage without compromising any other funds.

Thus, a trading failure becomes less of a concern, as experienced investors have a myriad of options to quickly mitigate risks. Having an independent isolated margin account allows investors to pursue distinctly different strategies without worrying about higher liquidation risks.

Cross Margin Mode

Conversely, we have a cross margin mode that flips the concept entirely. Imagine we already have a list of margin positions and are interested in obtaining one more. However, the margin requirements have become too high, nearly impossible to cover both the initial and maintenance margins assigned to the investor’s position. So, what would the correct approach for this scenario be? Should investors cease their trading efforts for the foreseeable future?

No.

With cross margin mode, investors can consolidate their positions with a unified margin balance. In simple terms, if an investor has ten different positions using the cross margin mode, they can share one margin balance. This option allows investors to add new portfolio positions without seeking significant liquidity.

When it comes to high-risk plays in the cryptocurrency market, cross margin mode is less appealing. Under this strategy, the threat of margin calls remains across the investor’s entire margin portfolio. Imagine a profitable price movement opportunity that might enter the market in the coming weeks or months.

With isolated margin, investors can luxuriously pursue this price movement without impacting their current positions. With cross margin trading, investors must consider this trade more carefully. After all, if the price movement does not succeed, investors might sacrifice months or even years of hard work.

While cross margin does not accommodate opportunistic decisions, it gives traders a chance to develop a more prominent position package. Therefore, even if investors can no longer bet on attractive but risky market options, they can make it up in terms of trading volume. With enough initial margin, the cross margin mode will enable investors to accumulate a considerable margin balance, significantly multiplying their potential profits.

In general, these two modes suit investors with different decision-making preferences. Isolated margin enhances the strategies of traders who like to pursue different strategies and limit their risk exposure to a single account. Conversely, cross margin trading allows you to build a vast portfolio but exposes your entire trading positions to general liquidation risks. There is no objective answer, but novice traders might be better suited to isolated margin, while each investor should decide for themselves—which strategy best fits their current situation and trading capabilities.

Additionally, there are other margin concepts encountered in futures trading.

Variation Margin

Variation margin refers to the difference between the initial margin and the current (margin) balance, calculated when a margin call is issued. The amount of this margin varies because it must be determined individually based on different position scenarios.

Available Margin

The total amount of assets available each day to initiate new trades is known as the available margin.

Bitget recommends that users engage in responsible trading with the aid of risk management tools. To facilitate this practice, when traders open positions in opposite directions using the same base and settlement currency, we only require margin for the position with the higher value.

Consider this example: Bob wants to go long on 5 BTC on Bitget during favorable market conditions. However, due to high volatility, he also wants to go short on 2 BTC to offset the risk of the long position, so that if the price falls, he will not need to settle the entire 5 BTC. When Bob uses Bitget's Coin-M Futures or USDT-M Futures (note that these two positions must use the same settlement currency, such as USDT or BTC), his margin account will only be deducted for the margin required for the long position.

This is a special design of the Bitget margin system, aimed at facilitating risk assessments and improving the efficiency of capital utilization.

Risk Margin

Risk margin is another type of margin requirement that determines the risk of each trader's account. From the example above, we know that Bob has mitigated his delivery obligations through hedging. The actual delivery obligation represents the maximum risk margin level, but it is updated in real time with changes in spot prices and futures values. We are proud to say that Bitget is the only cryptocurrency derivatives trading platform that uses this complex mechanism to better guard against liquidation risks.

Conclusion

Margin trading is more popular in less volatile markets, such as the international forex market. However, it is also applicable to cryptocurrency derivatives trading, helping more investors enter the cryptocurrency market. The essence of margin trading in cryptocurrency derivatives futures remains the same and has the following pros and cons:

Pros: Traders can significantly enhance their profit levels with a small amount of investment capital. Bitget can offer up to 125x leverage, greatly magnifying potential returns. Ultimately, traders are able to open multiple positions at reasonable costs, achieving portfolio diversification.

Pros: Margin trading is particularly suitable for experienced traders who spend considerable time in the market. Investors with good forecasting skills and a deep understanding of the cryptocurrency landscape can achieve considerable profits from margin trading. Margin trading does not allow you to own the cryptocurrency assets but allows you to gain from price differentials, whether profits or losses. Therefore, the main goal of this strategy is to benefit from price changes without actually bearing the risk of owning the assets.

Cons: The biggest issue with margin trading is the increased trading risk, where the losses incurred can significantly exceed the trader's initial margin. In a highly volatile market like cryptocurrencies, traders must be aware that price fluctuations could lead to substantial losses.

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