Why is the risk of Margin Trading so high? A deeper understanding of the Margin mechanism in Crypto Assets trading.

Quickly Understand the Key Points

• Leverage trading allows you to control larger positions with less capital, but it also multiplies the risk of losses.
• In the cryptocurrency market, leverage is mainly used in two ways: futures trading and margin trading.
• Even a 10% drop in price can lead to forced liquidation of the account with aggressive leverage strategies.
• To survive in leveraged trading, risk management is not an option but a necessity.

The True Nature of Leveraged Trading

Using small funds to leverage large positions sounds enticing, but this is precisely where leveraged trading is the most dangerous.

Leverage allows traders to participate in the market using borrowed funds instead of just their own money. For example, if you have $100 in your account and want to take a $1000 position in Bitcoin, leverage can help you achieve that goal. In this trade, $100 is your “margin” (collateral), and the remaining $900 comes from a loan.

Typically, exchanges use multiples to indicate leverage size: 10x means you can borrow funds equivalent to 10 times your principal, while 20x means 20 times. On some aggressive platforms, you can even borrow up to 100 times your funds, but such extreme leverage often leads to account destruction in the next market fluctuation.

In the cryptocurrency field, leveraged trading is mainly reflected in two areas: perpetual futures contracts and spot margin trading. Both allow traders to hold larger positions with only a fraction of their funds invested.

How the Margin System Works

Before engaging in leveraged trading, you need to understand two concepts: initial margin and maintenance margin.

Initial Margin is the minimum account balance required to open a position. This money serves as collateral for the loan. For example, if you want to take a $5000 Ethereum position with 5x leverage, the initial margin needed is $1000. If you choose 10x leverage, the initial margin drops to $500. The higher the leverage, the less margin is required, but the risks increase exponentially.

Maintenance Margin is the minimum account balance you must always maintain to keep your position open. When the market moves in an unfavorable direction, if your account balance falls below the maintenance margin threshold, the exchange will issue a margin call. If you still do not top up your funds, your position will be forcibly liquidated.

The core difference between these two concepts is: the initial margin is used to open a position, while the maintenance margin is used to keep a position. Traders need to continuously monitor both, otherwise they may be caught off guard during market fluctuations.

Understanding Actual Gains and Losses Under Different Leverage Multiples

risk cases of long positions

Assuming you are optimistic about Bitcoin and decide to use $2000 of your principal with 10x leverage to create a $20000 long position. The initial margin is $2000.

If the price of Bitcoin rises by 20%, your position is worth $24000. After deducting borrowing costs, you make a profit of $2000. Compared to going long with only $2000 in capital (which earns only $400 in profit), the leverage amplifies your returns.

But what about the opposite? If Bitcoin drops by 20%, the position value becomes $16000. You not only lose the entire $2000 principal, but you also owe the exchange $4000. Even if it drops by just 10%, the position falls to $18000, and the account balance will drop to 0 or negative, triggering a forced liquidation. The specific liquidation price varies depending on the risk control settings of the exchange, but it is usually forcibly liquidated at a drop of 10%-15%.

symmetric risk of short positions

When shorting, you borrow an asset (like 0.5 Bitcoin) and sell it at a price of $20000, expecting to buy it back at a lower price after the price drops.

If Bitcoin drops by 20% to $16,000, you can buy back 0.5 Bitcoin at $8,000, repay the loan, and keep a profit of $2,000.

But if Bitcoin rises by 20% to $24000, buying back 0.5 Bitcoin would require $12000. Coupled with the pressure of additional margin, your $2000 principal could be quickly wiped out, potentially triggering a forced liquidation.

Why Traders Choose to Use Leverage

Despite the obvious risks, traders still widely use leverage for two main reasons.

First, amplify profits. In successful trades, leverage can significantly enhance the rate of return. For traders who are confident in the direction of prices, leverage is a tool for achieving faster wealth growth.

Second, improve capital efficiency. If your goal is to take a $10,000 position with 5x leverage, you have two options: either deposit $10,000 in principal (no leverage) or deposit $2,000 in principal (5x leverage). The latter allows you to lock in the same position with less capital, and the remaining $8,000 can be used for other investments, participating in liquidity mining, or other strategies.

But these advantages come at the cost of bearing corresponding risks.

The Truth About Leverage Trading Risks

High leverage requires a lower margin, but it's a double-edged sword. For every 1% drop in price, high-leverage positions can incur losses that are 10 to 20 times greater than those without leverage. In the highly volatile crypto market, a 1% intraday fluctuation is common, and it can even happen within minutes.

Forced liquidation is the biggest threat in leveraged trading. If the market fluctuates sharply (especially during sudden negative news or technical sell-offs), your position may be liquidated before you even have a chance to react. Even if you plan to only withstand a 10% loss, you could end up losing all your margin due to a sudden market gap.

In addition, exchanges typically charge interest or fees for leveraged trading. When going long, you need to pay the financing rate, and the same applies when going short. These costs can accumulate daily, especially when you hold a position for a long time.

How to Protect Yourself in Margin Trading

If you choose to use leverage, the following points are crucial.

Use a lower leverage multiplier. A leverage of 5x or 10x can significantly amplify profits, while 100x leverage is like committing suicide. Low leverage gives you a larger buffer space, so even if there are unexpected market fluctuations, you won't be immediately liquidated.

Set Stop-Loss and Take-Profit Orders. A stop-loss order can automatically close a position when losses reach the amount you set, thereby limiting maximum losses. A take-profit order automatically closes the position when profits reach the target, locking in gains. These two tools are lifesavers in leveraged trading.

Always monitor your maintenance margin. Do not assume that the exchange will notify you. Actively check your account to ensure that your margin balance is sufficient, especially during market fluctuations.

Only trade with funds you can afford to lose. This is the most basic yet often overlooked advice. Never use money you cannot afford to lose for leveraged trading. Even experienced traders can get liquidated due to black swan events in the market.

Learn gradually rather than aggressively at once. Beginners should start with very low leverage and gradually increase it after gaining experience. The market tuition is the most expensive, so don’t pay it too early.

Summary

Leverage is a powerful tool, but it indiscriminately amplifies both profits and losses. In the highly volatile cryptocurrency market, reckless leveraged trading can quickly wipe out accounts. Understanding the core logic of margin, liquidation mechanisms, and risk management is fundamental to surviving in this field.

If you are interested in topics such as what futures contracts are, how to engage in margin trading, and how to set stop-loss and take-profit orders, it is recommended to study further. Leveraged trading is not a forbidden zone for investing, but it requires a professional mindset and disciplined execution.