On the other hand, an isolated margin specifies the open position to place the margin and manage risk. Keep reading to learn more about cross-margin and isolated-margin trading, the benefits and drawbacks.
What is Cross-Margin Trading in Crypto?
Cross-margin trading in crypto is a risk management strategy where traders use their entire account balance as collateral. Also, Cross margin is referred to as spread margin.
It shares the available balance of an asset across all relevant open leveraged positions in a particular account.
This implies that the entire account holdings are at risk to cover future trading losses. So, an account is well-margined if the entire margin requirements of all open positions are lower than the available balance.
Notably, it makes higher leverage possible, where traders can open larger trading positions with lesser capital.
While it carries more risks, it prevents individual position liquidation using the account balance as a support. To curtail risks, margin calls may occur. Therefore, traders must monitor their positions and place stop-loss orders. These stop-loss orders help to limit losses.
However, cross-margin trading is more beneficial for experienced traders but must be applied cautiously. Also, proper risk management is necessary to master this strategy fully.
Meanwhile, it is important that new traders fully understand a trading platform’s margin trading rules and terms.
How is Cross Margin Applied in Crypto Trading?
For instance, a trader with 0.1 BTC may open a long (buy) cross-margin trade on BTC/USD worth $10,000/BTC for one BTC token. We can estimate the initial margin necessities of this position based on the maximum allowed leverage for the trading pair with cross-margin.
For instance, if the initial margin requirement of the trade is 1% of 1 BTC, the trader must stake $0.02 BTC for the initial margin to open the trading position.
However, if BTC’s price declines, the initial margin will also decrease. Consequently, a cross-margin position draws from the total balance of the trader as its additional margin.
A user can rely on all their available funds to prevent account liquidation. Most trading platforms will place a margin call if the losses exceed the collateral. A margin call is simply a request created by an exchange or broker to cover losses or reduce the size of a trading position.
These margin calls prevent traders from losing more than the total value of their account. The trader either adds liquidity or the position is forcefully closed.
What is an Isolated Margin Call in Crypto Trading?
Isolated margin trading is a risk management strategy where traders can apportion some amount of collateral to each separate open position. An isolated margin call protects the account and overall positions from potential losses from a specific trade.
Therefore, isolated margin trading enables users to control the risk exposure per trade. Additionally, a specified amount of collateral supports each open position, and only the collateral assigned to such position is at risk.
Notably, this isolation of risk prevents the risk from spreading to other open positions or liquidating the total account balance. Furthermore, leverage is also allowed in isolated margin trading. However, it is important for trades to carefully manage their position sizes and collateral allocation to prevent overleveraging.
Also, some exchanges may activate margin calls if traders are prompted to increase their collateral or change position sizes. If the losses reach a specified limit, the margin call is triggered.
How is Isolated Margin Used in Crypto Trading?
For instance, a trader interested in isolated margin trading with an account balance of $10,000 may trade ETH and BTX separately. Each trade is done separately with a distinct and isolated margin; therefore, the trader can separate $2000 in a reserve account and apportion $5000 for the BTC trade.
Also, the trader can commit $3000 for the ETH trade. This strategy separates the BTC and ETH positions, limiting potential losses from the assigned collateral on each trade.
However, if the price of Bitcoin dips and the losses exceed the $5,000 collateral, a margin call will not be issued.
Note that whatever happens to the BTC price will not influence ETH. With an isolated margin, a trader can easily manage risks and monitor position sizes for a balanced trading experience.
Pros and Cons of Cross Margin
Pros
- Cross margin makes risk management easy but could expose a trader to sizable losses since it uses the entire account as collateral.
- It provides higher opportunities for greater profit due to the increased leverage.
- Also, gross margin can be used to balance unrealized losses relying on unrealized profits, thereby reducing the chances of position liquidation.
- Cross margin is quite useful for traders seeking to hedge or support existing positions.
Cons
- Cross margin exposes the entire available balance of a trader at risk. Notably, the crypto market is highly volatile, and a sudden shift could make a trader lose the entire balance.
- Traders have less control over specific positions on specific positions. Therefore, traders seeking to manage positions can opt for isolated margin trading for more control.
Pros and Cons of Isolated Margin
Pros
- Isolated margin trading gives traders greater control over individual positions. Therefore, it is ideal for uncertain trades opened with great leverage.
- Although isolated margins inflate the risk of liquidation, the position margin selected by the trader is the only portion of the account exposed to risks. Therefore, the remaining account balance is preserved and not exposed to losses.
- In isolated margin trading, the open position can be managed by a trader to prevent liquidation by providing additional margin.
Cons
- If unrealized losses reduce the traders’ position margin in an isolated margin position, then the trade will be liquidated. This liquidation will be carried out irrespective of the total balance in a trader’s account.
- Isolated margin positions expose a trader to higher risks. Therefore, they must be carefully managed.
Cross Margin and Isolated: Which is Better?
Margin trading is best adopted by investors comfortable with trading cryptocurrencies. It comes with some risks. Also, it requires some knowledge of trading beyond the beginner level.
Notably, it is a more complex strategy than spot trading, requiring the trader to analyze different situations in the market. So, the decision on which strategy is better lies on the traders’ preference, expertise, and risk tolerance after analyzing their differences below.
| Cross Margin | Isolated Margin |
| Gives traders a margin across all active positions in their portfolio. | Enables traders to isolate a single margin position. |
| It provides users with a higher chance to avoid a margin call and subsequent account liquidation. | Any margin that is in loss is isolated from the other positions as a trader. |
| A reliable option for traders looking to manage multiple open positions at once. | It is ideal for high-risk margin trading. |
Conclusion
Based on the risks and unpredictability of the crypto market, it is quite difficult to decide if margin trading is ideal. Notably, it enables traders to earn profits without having the required resources.
But, due to sudden price deviations, margin trading might become stressful and quite demanding. Also, it requires adequate trading experience to utilize this strategy. So, all traders are advised to apply proper risk management techniques for successful trading.
FAQs
What is Cross Margin?
What is an Isolated Margin?
Is a Cross Margin Better Than an Isolated Margin?
What are the Benefits of Cross Margin?
What are the Benefits of Isolated Margin?
