In the derivatives market, margin is the collateral that investors must deposit with a central clearing platform (usually an exchange) before trading derivatives contracts to cover some or all of the credit risk the holder may pose to the counterparty. In the crypto market, collateral can be cash equivalents (such as stablecoins) or cryptocurrencies deposited into the account, representing that the account holder has performance funds that can be used to trade perpetual contracts, futures contracts, or options contracts.
In traditional markets, most exchanges today use the SPAN ("Standard Portfolio Risk Analysis") method, developed by the CME (Chicago Mercantile Exchange) in 1988, to calculate margin on options and futures. In the crypto market, the calculation method for margin is relatively simple and is mainly calculated based on the nominal value of the position, profit and loss, and leverage level.
When you open a position to trade perpetual contracts, you will first come into contact with the initial margin and maintenance margin.
Initial Margin: Initial margin is the money you must pay before opening a position. The initial margin for a perpetual contract is usually determined by the leverage you can accept. The higher the leverage level, the less the margin you must provide.
For example, if you trade with 100x leverage, you only need to pay an initial margin equivalent to 1% of the face value of the contract to open a position. It should be noted that less initial margin means lower risk resistance; even if market fluctuations are limited, you may be forced to close your position because the margin does not meet the requirements.
Maintenance margin: Maintenance margin is the minimum equity an investor must hold in a margin account in trading. In the crypto market, if the equity in the margin account falls below the maintenance margin, the exchange will issue a margin call requiring investors to deposit more collateral into the margin account to bring the funds to the minimum maintenance margin level to meet margin requirements. However, if the market fluctuates violently, you may be forced to liquidate your position due to your inability to deposit sufficient funds in time.
Depending on the features and settings of your positions, you may also be exposed to three margin modes: isolated margin, cross margin, and portfolio margin.
Isolated margin: In the isolated margin mode, each position you open has its own margin balance, and the positions are independent and do not interfere with each other. The isolated margin mode is "relatively safe": each trading operation will only affect one margin position. Whatever happens in this margin position will not affect the rest of your portfolio or available balance. Even if the position is liquidated, your maximum loss is only the margin in the position.
Cross margin: In the cross margin mode, the positions you open will share the margin balance, and all available balances in your account will be regarded as collateral. The cross-margin helps improve your capital efficiency, allowing you to obtain relatively more considerable exposure and thus have higher expected returns.
However, this also means that the risks and possible losses you face will increase exponentially; in the worst scenario, you may lose your entire available balance and be forced to liquidate your position.
Portfolio margin: In portfolio margin mode, all your currently trading products and positions will be included in the standardized portfolio risk analysis system. The portfolio risk analysis system can accurately calculate the overall market risk of any investment portfolio. Based on this, the system will calculate the margin that should be charged combined with the exchange's risk management philosophy.
Compared with the isolated margin and cross-margin models, the portfolio margin model can fully release flexibility in using funds while reducing the cost of margin use.