What is isolated margin in the cryptocurrency market?
What is isolated margin and how is it used in trading? Trader benefits and distribution options.
What is isolated margin?
This is one of the trader’s tools that allows him to use a separate position regardless of the total cash balance, that is, in the event of liquidation of this position, the maximum loss is limited only by its margin and nothing more.
Recall that liquidation occurs automatically when the amount of the initial margin falls below the maintenance margin. The greater the leverage, the higher the risk of losing a position even with minor price fluctuations.
Isolated Margin does not affect any other open trades in the account, nor does it affect other trades. This means that the loss of one account will not change the balance of the others.
Standard example, or how it works
For convenience, let’s round up the cost of one bitcoin to $10,000. Let’s say a trader has 0.1 BTC and opened a position to buy the BTC/USD pair with 100X leverage. Under these conditions, the margin requirement is 1% of the whole bitcoin, that is, the initial margin is 0.01 coins. Recall that we are talking specifically about isolated margin.
If the maintenance margin is, for example, 0.5% of an open trade, the trader secures a balance of approximately 0.005 BTC. The percentage depends on the site on which the auction is conducted.
Imagine a situation where the price of bitcoin fell from $10,000 to $9,950. Accordingly, the margin balance drops to 0.005 coins. If the price falls again, the position is liquidated. The trader’s loss under these conditions is the initial margin of 0.01 bitcoin.
An alternative to isolated margin
For more experienced traders and mutual maintenance of transactions, there is a cross margin, or “cross margin”. Unlike the isolated one, it is distributed among open positions and uses the entire balance available on the account. This is convenient because the risk of liquidation with small price fluctuations is greatly reduced. On the other hand, with more significant jumps in bitcoin, there is a high risk of losing everything in general