Margin (Leveraged) Trading: Purchase and sale of a financial asset, like cryptocurrency, using Leverage to open larger positions with a small collateral amount in order to profit from the market swings.

Cryptocurrency derivatives like Bitcoin Perpetual Contracts are floating around the Internet and attracting more and more people. New traders are often experience loss or even get their trading accounts wiped out. It happens because Margin or Leveraged trading is often misunderstood and misconceptions. Leveraged trading is not gambling, and cryptocurrency trading profit is not luck but continuous calculations, planning, and careful risk management.

Margin or Leveraged trading refers to opening a large position on an exchange using a small amount of money as collateral. Leverage is an instrument that gives an opportunity to make a bigger profit, but on the opposite side, high Leverage applied can become a short path to a Liquidation and Margin loss.

According to the BTCMEX Codex, Leverage is a multiplication of the Initial Margin by x to give the total position value, while Margin is the amount of money put to open a position.

Let’s take a look at the graph above. The total position value is 100% with the 3x Leverage selected, 33.3% of the total value is the Initial Margin, 5x Leverage requires 20% Margin, 10x Leverage – 10% Margin. It’s easy to calculate that only 1% Margin is required to open a 100x Leveraged position. For example, to open a $500 position with 100x only $5 is needed as the Initial Margin.

There’s a flip side of the coin and it’s called Liquidation. Liquidation is an automatic closing of the position due to a significant Margin loss. Margin is locked to finance the position. If the position value drops with the amount of Margin, Liquidation occurs, and the whole Margin is lost.

Liquidation is marked with the red lines on the graph. Let’s take a closer look at the 100x Leverage example.

100x Leverage = 1% Margin needed to open a position

Less than 1% price move against a trader = Liquidation

The Bitcoin market is known for its high volatility. The chart below shows the 24 hours change in BTC/USD price which is on average 5%, exceeding 25% movement on the day of extreme volatility.

Bitcoin Volatility 24 h Chart

The BTCMEX Calculator helps to determine the Liquidation price before opening a position. Let’s compare these examples. For a 500 Perpetual Contracts Long position with the same entry price of 6,000 USD per BTC, the Liquidation Price of a 100x leveraged position would be 5,971, while the 20x Leverage would keep the Liquidation away pushing the price to a much safer 5,742.5 USD.

Calculate Liquidation Price on BTCMEX

BTCMEX never recommends new entry traders to apply high leverage to their positions. Experts say that the safe range of Leverage is not more than 20-25%. Further trading tips should be considered prior to entering the market:

  • Determine the risk amount that’s affordable to lose
  • Identify the Entry Price and the Liquidation Price
  • Determine Margin and Leverage accordingly
  • Set the Stop Loss order