Margin = Position size / Leverage multiple
1. What is a perpetual contract?
Perpetual contracts do not have an expiration or settlement date, but in order to maintain the anchoring between perpetual contracts and spot prices, a "funding rate" mechanism is introduced so that the prices between perpetual contracts without delivery dates and spot prices can be basically anchored.
When the contract price is higher than the spot price, in order to make the contract price drop to approach the spot price, the long side pays the funding rate to the short side. This encourages more people to short and makes the perpetual contract price drop. At this time, the funding rate is displayed as a positive value (greater than 0).
When the market is bullish, the funding rate is positive, and the longs need to pay the funding rate to the shorts, which means that the longs have a holding cost at this time. On the contrary, if the short sentiment is strong, the funding rate is negative, and the shorts pay the funding rate to the longs, which means that the shorts have a holding cost at this time.
2. Order placing and order taking
Maker: A limit order. Because it provides liquidity, the transaction fee is generally cheaper. You place an order according to your own wishes and wait for it to be executed.
Taker: A market order. Because liquidity is extracted, the handling fee is generally higher. It directly trades with the pending orders. The traded orders disappear from the market, and the pending orders are eaten up, which is called a taker.
The order and taker of the market
3. Calculation of handling fee
When opening and closing orders, the exchange will charge a handling fee, but the exchange will not charge the funding rate of perpetual contracts. The funding rate has nothing to do with the leverage ratio, but only with the size of our position.
The handling fee is charged in both directions, that is, the handling fee is charged for opening and closing positions, and the handling fee is charged by the exchange.
Example:
Limit order (pending order) = maker fee 0.02%
Market order (taker order) = taker fee 0.04%
100u opens 5 times leverage, position size = 100u * 5 = 500u
Limit opening fee = 500u * 0.02% = 0.1u
Market opening fee = 500u * 0.04% = 0.2u
Funding Fee = Position Value * Current Funding Rate
The value of the open position is:
Standard contract: open position value, mark price, number of contracts, contract face value, contract multiplier. Standard contract: open position value = mark price × number of contracts × contract face value × contract multiplier.
Currency-based contracts: Position value × Number of contracts × Contract face value × Contract multiplier / Mark price Currency-based contracts: Position value = Number of contracts × Contract face value × Contract multiplier / Mark price
When the funding rate is positive, longs pay shorts; when the funding rate is negative, shorts pay longs.
4. Long/Short Process
Leveraged trading process: borrow currency - invest - repay currency and interest.
For users, many of the processes in the middle are unknown to them. As long as they know the pledged margin, they can trade.
4.1 Going Long
Pledge 100USDT to the exchange to obtain the right to borrow currency, USDT = "margin"
Borrow USDT from others on the exchange
Use the borrowed USDT to buy BTC immediately
After BTC goes up, sell BTC to get more USDT
Exchange the borrowed USDT to the exchange to make a profit
4.2 Short Selling
Pledge 100USDT to the exchange to obtain the loan qualification, USDT = "margin"
Borrow BTC from others on the exchange
Sell the borrowed BTC immediately and exchange it for USDT
Wait for BTC to fall, then use USDT to buy cheap BTC
Return BTC to the exchange and realize profit
5. U-standard and currency-standard
U-margin contract: USDT is used for settlement, and the price fluctuation and profit are 1:1. If USDT is used as margin to open an order, the profit/loss is USDT.
Currency-based contracts: quoted in USD, settled in BTC. If BTC is used as margin, the profit/loss is the amount of BTC.
the difference:
U-based contract: the value will not change, 1u is always 1u.
Coin-margined contracts: Coins are used as margin, but the value of this margin is variable, and it will fluctuate according to the rise or fall of the market. If you use a coin-margined contract to go long 5 times, then if it goes up, you actually make 5+1 money, 5 is the money you make from leverage, and 1 is the money you make from margin. In other words, when doing coin-margined contracts, your leverage comes with a positive plus 1 (whether you go long or short). If you use coin-margined contracts to go short, then your leverage comes with a minus 1. For example, if you use coin-margined contracts to go short at 1 times, and the price of the coin falls, you earn the number of coins, but because coin-margined contracts come with a positive 1 times, the number of coins you increase and the drop in the unit price of your coin are multiplied together, and in the end your dollar value remains unchanged (the value remains unchanged, but the number of coins increases).
Scenes:
U-based contracts are generally used because they are easier to settle.
Coin-based scenario: In the early stage of the bull market, you can use coin-based low leverage to open long positions, that is, adjust the leverage to less than 5 times, plus the coin-based 1x leverage, so that as the market rises, you can earn twice as much money. When you close this order, in addition to the profit you earn, there is also the profit brought by the increase in your margin itself. It has the attributes of spot, and the advantage is that you will not get off the train.
6. Contract Calculation
Position size Contract value Margin Leverage multiple Position size (Contract value) = Margin ∗ Leverage multiple
Margin Position Size Leverage Multiple Margin = Position Size / Leverage Multiple
Margin rate Margin position size Margin rate = Margin / Position size
Liquidation condition: price increase or decrease * leverage ratio = 100%
If you use 100u as margin and open 5x leverage, the position size = 100u * 5 = 500u
500u position = You need to bear the profit and loss brought by the rise and fall of the currency worth 500u. If the 500u position loses 100u, because your margin is only 100u, your position will be liquidated.
6.1 Margin
U-standard (forward contract)
Position value of forward contract = contract face value x number of contracts x mark price
Forward contract position value = leverage * margin amount
So in a forward contract: Contract value x Number of contracts x Mark price = Leverage multiple * Margin amount
Margin amount Contract face value Number of contracts Marked price Leverage multiple Margin amount = Contract face value ∗ Number of contracts ∗ Marked price / Leverage multiple
For example, when the BTC price is 20,000 USD, buy 5 BTC forward contracts with 2x leverage, then: margin = 0.1200005/2 = 5000USDT. (Assuming 0.1BTC is the face value of a contract, 20,000 is the mark price, 5 is the number of contracts, and 2 is the leverage multiple)
Currency-based (inverse contract)
The position value of the reverse contract = contract face value * number of contracts
The position value of the reverse contract = leverage times margin amount mark price
So in the reverse contract: Contract value x Number of contracts = Leverage times x Margin amount x Mark price
Margin Quantity Contract Face Value Number of Contracts Leverage Multiple Marked Price Margin Quantity = Contract Face Value ∗ Number of Contracts / (Leverage Multiple ∗ Marked Price)
In the above example, the position value of the forward contract is 10,000 USD, so in the reverse contract, we also buy a contract with the same position value, and need to buy 100 contracts (assuming that one BTC reverse contract is 100 USDT, buying 100 contracts is 10,000 USD). Then: margin = 100100/(220000) = 0.25 BTC, 0.25 BTC is exactly worth 5000 USDT, which is consistent with the margin amount of the forward contract we calculated above.
Note: The initial margin is fixed. If the initial margin is calculated, then the mark price = the average opening price
6.2 Unrealized Profit and Loss (Floating Income)
USDTMargin Contract
Long position income Contract face value Number of contracts Mark price Average opening price Long position income = Contract face value × Number of contracts × (Mark price – Average opening price)
Short position income Contract par value Number of contracts Average opening price Mark price Short position income = Contract par value × Number of contracts × (Average opening price – Mark price)
In the above example, assuming we buy 5 BTC contracts when the price is 20,000 USD and sell them when the price is 25,000 USD, the profit and loss of this operation is:
Profit and loss = 0.1 5 (25000 - 20000) = 2500USDTCurrency StandardMargin Contract
Long position income Contract par value Number of contracts Average opening price Mark price Long position income = Contract par value × Number of contracts × (1/Average opening price – 1/Mark price)
Short position income Contract face value Number of contracts Mark price Average opening price Short position income = Contract face value × Number of contracts × (1/Mark price – 1/Average opening price)
In the above example, if we buy 100 BTC reverse contracts when the price is 20,000 USD, the position value when opening = 100*100 = 10,000 USD, and sell when the price is 25,000 USD, then the profit and loss of this operation = 100 100 (1/20000 - 1/25000) = 0.1BTC, the profit or loss is 2500USDT.
Note: Mark price = Closing price
From the above two examples, we can see that the BTC earned from the reverse contract, if sold at the closing price, is equal to the USDT earned from the forward contract.
From these two formulas, we can see that the relationship between the U-based contract and the opening and closing price difference is linear, but the currency-based contract is not. The currency-based contract will show a convex function relationship.
Therefore, the characteristics of the coin-based contract are: when the price rises, the BTC earned does not increase linearly, but becomes less and less. Conversely, when the price falls, the BTC lost does not decrease linearly, but becomes more and more.
Coin-based contract function
The contract face value of Binance is 100 US dollars per contract, and the price of Bitcoin is 12,000 US dollars. What does it mean to open 100 contracts?
This means the number of coins held is: 100 x 100 / 12000 = 0.83333 BTC.
BTC rises from 12,000 to 14,000. You decide to close your position. How much profit do you make?
When closing the position: 100 x 100 / 14000 = 0.714 BTC.
Profit: 0.833 - 0.714 = 0.119 BTC
BTC price is $10,000, 100 contracts. In the case of coin standard:
Up 50%, long profit = 100 100 (1/10000-1/15000) = 0.3333 BTC
Loss of 50%, long position profit = 100 100 (1/10000-1/5000) = -1 BTC
The profit and loss of a long position in a currency standard is nonlinear. When the market rises, your profit is slowing down. When the long position falls, more margin is required, and long positions are more likely to be liquidated than short positions.
A BTC long position, from 10,000 to 100,000, only earned 90,000 from the perspective of U. But from the perspective of the coin: 1/1 - 1/10 = 0.9BTC (the value is still 90,000).
1 BTC long, fell from 10,000 to 6k, lost 4k from the perspective of U, but from the perspective of the coin: 1/1 - 1/0.6 = -0.667BTC.
The interesting thing about 1x short selling in coin standard is that your position will not be liquidated, the price will almost maintain its value whether it goes up or down, and you can earn/lose some funding fees at the same time.
Assuming that BTC is worth 20,000 USD and you have 10,000 USD, you can open 100 1x short orders and hold 0.5 BTC.
If BTC rises from 20,000 USD to 30,000 USD, and you hold 0.5 BTC, how much will you lose?
Loss = 100 100 (1/30000 - 1/20000) = -0.1667 BTC
After closing the position, the currency held = 0.5 - 0.1667 = 0.3333 BTC
Value = 0.3333 * 30000 ≈ 10000 USDT
Assume that BTC costs 20,000 USD per coin and it drops to 7,000 USD, and you hold 0.5 BTC.
Profit = 100 100 (1/7000 - 1/20000) = 0.92857 BTC
BTC after closing position = 0.5 + 0.92857 = 1.42857 BTC
The corresponding value of U = 1.42857 * 7000 ≈ 10000 USDT
Hedge the high part and take profit on the low part.
If you open a 1x short position in coin-based trading, the value of U will remain unchanged and you will not get liquidated. If you open a 1x long position in coin-based trading, you will get liquidated.
Every time the market crashes, taking profit on some of the short positions is equivalent to directly holding the currency. In other words, it is bottom fishing.
After the rebound, continue to add short positions at high levels, which is equivalent to hedging after the currency you bought at the bottom in the previous step appreciates (locking the value, and the rise and fall will not affect the value). However, if the price continues to fall after the plunge, there will be a loss on the currency (so close part of the position, not all).
Yield Curve Function
U-standard yield function curve
Currency-based yield function curve
If the opening price is 5w, 20 times, 40 contracts are opened in U-standard and 200 contracts are opened in coin-standard (the position sizes of U-standard and coin-standard are the same at this time)
Long position profit on the basis of contract par value Number of contracts Mark price Average opening price U Long position profit on the basis of contract par value × Number of contracts × (Mark price – Average opening price)
Currency-based long position income Contract par value Number of contracts Average opening price Mark price Currency-based long position income = Contract par value × Number of contracts × (1/Average opening price – 1/Mark price)
Yield curve function summary:
The size of the profit has nothing to do with leverage, but only with the size of the position. For a small position, even if the leverage is set to 100 times, the profit will have a ceiling.
The coin standard is nonlinear, which means that if you open a long position with the coin standard, when the market falls, the faster you lose the coins, if there is no stop loss, then you will need to add a lot of coins for margin. Of course, if you only use U to buy coins to add margin when the market falls, the value is the same as that of the U standard.
When the currency base return is positive, the rate of increase in the currency quantity return is steady; but when the return is negative, the currency quantity loss is exponential.
If the contract is for earning more coins, then in order to avoid reverse market conditions, a stop loss line must be set.
The biggest conclusion: the contract must have a stop-loss line, leverage moderately in a bear market, and gradually deleverage in a bull market.
6.3 Liquidation Price
The basic principle of forced liquidation is: when loss = margin, it will trigger a margin call.
Long N times Short N times U-standard down: 1/N up: 1/N Coin standard down: 1/(N+1) up: 1/(N-1)
With a coin-based contract, if you short at one time, you will never get liquidated!
7. Transaction Remember
High leverage only reduces your opening margin. The size of the leverage is the same, the entry position is the key. Be sure to calculate the position before opening a position.
The contract must have a stop loss line.
Contract risk control: position, stop loss line
8. Noun Concept
Mark Price: The mark price is a reference price calculated based on the underlying index of the derivative. The index is usually calculated as a weighted average of the asset's spot prices across multiple exchanges. The purpose of this calculation is to avoid price manipulation on a single exchange and provide a more accurate representation of the asset's value. Mark Price = Spot Index Price + Basis Moving Average.
Index price: spot index on multiple exchanges
Latest price: the price of the latest transaction in the market. The mark price will be a little slower than the market price to avoid the current price of the contract market fluctuating too fast and someone making malicious profits.
Contract Price = Mark Price
9. Frequently Asked Questions
Will 1x short position lead to liquidation?
A 1x short position in coin-based currency will not result in a margin call, but a 1x short position in U-based currency will result in a margin call.Does the 1x short selling value of the currency standard remain unchanged?
Yes, using the coin standard 1x short, the value of U will not change. The number of shorted coins has increased, but the price of the coin has dropped, so the value converted into USDT remains unchanged.What is the contract multiplier?
Default is 1
