In brief
Isolated margin and cross margin are two different types of margin available on many cryptocurrency trading platforms.
With Isolated margin, investors decide how much money to allocate as collateral to a specific position, and the rest of the account balance is not affected by this transaction.
Cross margin uses all available funds in your account as collateral for all trades. If one position goes against you but another position is profitable, the profits can be used to cover losses, allowing you to keep your position open longer.
Choosing between Isolated margin and cross margin depends on an individual's trading strategy, risk tolerance and how actively they wish to manage their position.
What is margin trading?
Before we cover isolated margin and cross margin, let's have a brief overview of margin trading. In margin trading, investors borrow funds from an exchange or broker to buy or sell more assets than they could afford on their own. They use the assets in their accounts as collateral to borrow money and place larger bets in the hope of making more profits.
Let's say you have $5,000 and think the price of Bitcoin will increase. You can buy 5,000 USD of Bitcoin directly or leverage your position to trade with borrowed money. Let's say the price of Bitcoin increases by 20%. If you just invested $5,000 without using leverage, your investment is now worth $6,000 ($5,000 initial + $1,000 profit). That's a 20% increase on your initial investment.
However, if you used 5:1 leverage on your $5,000, you would borrow four times the amount you have and hold $25,000 to invest ($5,000 from your initial capital and 20,000 USD as a loan). With a 20% increase in bitcoin price, your $25,000 investment is now worth $30,000 ($25,000 initial + $5,000 profit). After you pay back the $20,000 loan, you have $10,000 left. That's a 100% return on your initial $5,000 investment.
Remember, margin trading is very risky. Consider the opposite scenario where the price of Bitcoin drops 20%. Your $5,000 investment without leverage would be worth $4,000 ($5,000 initial capital - $1,000 loss), subject to a 20% loss. But with 5:1 leverage, your $25,000 investment would be worth $20,000 ($25,000 initial capital - $5,000 loss). After paying back the $20,000 loan, you will have nothing left, losing 100% of your initial investment.
This simple example does not include trading fees or interest that may be payable on the borrowed amount, which will reduce your profits in real trading situations. It's important to remember that markets can change rapidly, leading to potential losses that can even exceed your initial investment.
Isolated Margin - What is isolated margin?
Isolated Margin and cross margin are two different types of margin available on many cryptocurrency trading platforms. Each regime has its own benefits and risks. Let's understand what they are and how they work.
In Isolated margin mode, the deposit amount is limited to a specific position. This means you decide how much you want to allocate as collateral to a particular position, and your remaining funds are not affected by that particular trade.
Let's say you have a total account balance of 10 BTC. You decide to open a leveraged long position on Ethereum (ETH), with the belief that the price of ETH will increase. You allocate 2 BTC as isolated margin for this trade with 5:1 leverage. This means you are effectively trading 10 BTC worth of Ethereum (2 BTC of your own money + 8 BTC leveraged position).
If the price of Ethereum increases and you decide to close the position, any profit you made will be added to your initial 2 BTC deposit for this trade. But if the price of Ethereum plummets, the maximum you can lose is your isolated margin of 2 BTC. Even if your position is liquidated, the remaining 8 BTC in your account remains unaffected. That's why it's called "isolated" Escrow.
Cross Margin - What is cross margin?
Cross Margin uses all available funds in your account as collateral for your trades. If one position goes against you, but another position turns out to be profitable, the profits can be used to cover losses, allowing you to keep your position open longer.
Let's see how it works in an example. You have a total account balance of 10 BTC. You decide to open a leveraged long position on Ethereum (ETH) and another leveraged short position on a cryptocurrency we will call Z, using Cross Margin. For Ethereum, you trade 4 BTC using 2:1 leverage, and for Z, you trade 6 BTC, also at 2:1 leverage. Your entire 10 BTC account balance is used as collateral for both positions.
Suppose the price of Ethereum falls, causing a potential loss, but at the same time, the price of Z also falls, resulting in a profit for your short position. Profits from trading on Z can be used to offset losses from trading on Ethereum, keeping both positions open.
However, if the price of Ethereum falls and the price of Z rises, both of your positions could suffer losses. If these losses exceed your total account balance, both positions may be liquidated and you may lose your entire account balance of 10 BTC. This is very different from Separate Margin, where only the 2 BTC you allocate to trading is at risk of loss.
Remember, these are very simple examples and do not include transaction fees or other costs. Additionally, real trading situations are often much more complex.
The main difference between Isolated Margin vs. Cross Margin
From the above examples, we can clearly see the similarities and differences between Isolated Margin and Cross Margin trading. We can summarize their main differences in the following way:
Mortgage and liquidation mechanism
In isolated margin, only a specific portion of your funds is isolated and at risk for a specific trade. This means that if you are trading with 2 BTC in isolated margin mode, only those 2 BTC are at risk of being liquidated.
But in cross margin, all the money in your account will act as collateral for your trades. If a position goes against you, the system can use your entire account balance to prevent the position from being liquidated. But you risk losing your entire balance if things get really bad when making multiple transactions.
Risk management
Isolated margin allows for more detailed risk management. You can allocate the specific amount you are willing to risk to each trade without affecting the rest of your account. In contrast, Cross margin will combine risk across all your open positions. It can benefit from managing multiple positions that offset each other, but pooling risk can also mean a higher chance of loss.
Flexibility
In isolated margin trading, you must manually add funds to that separate margin position if you want to increase the margin level. Cross margin, on the other hand, automatically uses the available balance in your account to avoid liquidating any positions, making it easier to maintain margin.
In case of used
Isolated margin is suitable for traders who want to manage risk on a per-trade basis, especially when they have high convictions about specific trades and want to isolate risk. Cross margin is more suitable for traders who are taking multiple positions that can hedge against each other, or for those who want to take full advantage of their account balance while having an easier approach to maintaining maintain margin.
Advantages and disadvantages of Isolated Margin - Separate margin
Here are the advantages and disadvantages of separate escrow:
Advantages of Isolated Margin - Separate margin
Controlled risk: You decide how much money you want to allocate and risk to a particular position. Only this amount is at risk, helping to keep the rest of your funds safe from potential losses on that particular trade.
Clearer profit and loss (P&L): Calculating profit and loss for an individual position is easier when you know the exact amount tied to that position.
Predictable: By segregating funds, traders can predict the maximum loss they may face in a worst-case scenario, supporting better risk management.
Disadvantages of separate escrow:
Requires strict monitoring: Only a specific portion of funds is backed by a position so you need to monitor the trade more closely to avoid liquidation.
Leverage restrictions: If a trade starts moving against you and is close to being liquidated, you cannot automatically use the remaining funds in your account to stop that trade. You will have to add additional funds manually to a separate deposit.
Management costs: Handling multiple separate margin levels for different trades can be complicated, especially for beginners or those managing multiple positions.
In summary, although segregated margin provides a controlled environment for managing risk in leveraged trading, it requires more active management and can sometimes limit potential profits if not used with caution.
Advantages and disadvantages of Isolated Margin - Separate margin
Here are the advantages and disadvantages of cross margin:
Advantages of cross margin
Flexibility in margin allocation: Cross margin automatically uses any available balance in the account to prevent liquidation of any open positions, providing greater flexibility than separate margin.
Position Offsetting: Profits in one position can help offset losses incurred in another position, making it potentially useful for hedging strategies.
Reduced liquidation risk: By pooling your entire balance, the risk of premature liquidation of any position is lower as a larger pool of funds can meet margin requirements.
Easier management with multiple trades: It simplifies the process when managing multiple trades at the same time because you don't have to adjust the margin of each trade individually.
Disadvantages of Cross margin
Higher risk of total liquidation: If all positions go unfavorably and the total loss exceeds the total account balance, there is a risk of losing the entire account balance.
Less control over individual trades: Since the margin is shared across all trades, it becomes more difficult to allocate specific profit and loss ratios to individual trades.
Excessive potential leverage: With the ease of leveraging the entire balance, traders may be tempted to open larger positions than they could with isolated margin, potentially leading to losses larger hole.
Level of risk is less clear: It is difficult to assess the total level of risk at a glance, especially if there are many open positions with different levels of profits and losses.
An example using both Isolated Margin and Cross Margin modes
Integrating both separate margin and cross margin modes can be an elegant way to maximize profits and minimize risk in cryptocurrency trading. Let's see how it works in an example.
Let's say you have a bullish outlook on Ethereum (ETH) due to upcoming upgrades, but you're also looking to hedge against potential risk from overall market volatility. You think that while Ethereum may go up in price, Bitcoin (BTC) may experience a price decline.
You may consider allocating a specific portion of your portfolio, such as 30%, to take a leveraged long position on Ethereum using Isolated Margin. This way, you will limit your potential loss to this 30% in case the Ethereum price does not perform as you expected. But if Ethereum goes up in price, you will make a significant profit from this part of your portfolio.
With the remaining 70% of your portfolio, you use cross margin by opening a short position in Bitcoin and a long position on another altcoin Z that you believe will perform well regardless of Bitcoin's volatility.
This way, you are using the potential profits from one position to offset the potential losses from the other. If Bitcoin falls (as you predicted), the profits from this could compensate for any losses from Z and vice versa.
After establishing these positions, you need to continuously monitor both strategies. If Ethereum begins to decline in price, consider reducing your separate margin position to limit losses. Similarly, if Z in a cross margin strategy begins to significantly underperform, you may want to consider adjusting positions.
By combining both separate margin and cross margin you are actively trying to profit from your market predictions while also hedging your risk. But while combining these strategies can help manage risk, it does not guarantee profits or protect you from losses.
summary
Margin trading, with its potential to increase profits, comes with an equal, if not higher, level of risk. Choosing between cross-margin and separate margin depends on an individual's trading strategy, risk tolerance, and how actively they want to manage their position.
In cryptocurrency trading, where volatility is often the name of the game, understanding the intricacies of both types of margin is paramount. A wise decision, coupled with dedicated risk management measures, can help traders navigate the tumultuous waters of the cryptocurrency market. As always, it is essential to do thorough research and, if possible, consult with experts before diving into margin trading.
Read more:
What is Margin Trading?
What Is Leverage In Cryptocurrency Trading?
How hedging works in cryptocurrency and seven hedging strategies you need to know
Tuyên bố miễn trừ trách nhiệm và Cảnh báo rủi ro: Nội dung này được trình bày cho bạn trên cơ sở “nguyên trạng” chỉ nhằm mục đích cung cấp thông tin chung và hướng dẫn, không phải là sự cam đoan hay bảo đảm dưới bất kỳ hình thức nào. Nội dung này không nên được hiểu là nội dung tư vấn tài chính, pháp lý hoặc chuyên môn khác, cũng như không nhằm khuyến nghị mua bất kỳ sản phẩm hoặc dịch vụ cụ thể nào. Bạn nên tìm kiếm lời khuyên cho mình từ các cố vấn chuyên môn phù hợp. Trong trường hợp bài viết do cộng tác viên bên thứ ba đóng góp, xin lưu ý rằng những quan điểm thể hiện đó thuộc về cộng tác viên bên thứ ba và không nhất thiết phản ánh quan điểm của Binance Academy. Vui lòng đọc toàn bộ tuyên bố miễn trừ trách nhiệm của chúng tôi tại đây để biết thêm chi tiết. Giá tài sản kỹ thuật số có thể biến động. Giá trị khoản đầu tư của bạn có thể tăng hoặc giảm và bạn có thể không lấy lại được số tiền đã đầu tư. Bạn hoàn toàn chịu trách nhiệm đối với các quyết định đầu tư của mình và Binance Academy không chịu trách nhiệm pháp lý đối với bất kỳ tổn thất nào bạn có thể gặp phải. Tài liệu này không nên được hiểu là nội dung tư vấn tài chính, pháp lý hoặc chuyên môn khác. Để biết thêm thông tin, hãy xem Điều khoản sử dụng và Cảnh báo rủi ro của chúng tôi.
