How Leverage, Margin, and Liquidation Work in Crypto Derivatives
Summary
The tutorial defines leverage as position size divided by collateral and margin as the funds supporting a position. It distinguishes initial margin, needed to open a trade, from maintenance margin, needed to keep it open. Worked arithmetic examples show how to derive leverage, position size, or margin. It also describes standard margin, where positions share account collateral, and isolated margin, which can be approximated with separate subaccounts.
A central risk lesson is that leverage does not change profit, loss, or fees for a fixed position size, but it brings the liquidation threshold closer to the market price as leverage rises. The article explains liquidation as forced closure when remaining collateral cannot meet requirements, and distinguishes this from the bankruptcy price where funds reach zero. Its price discussion assumes BTC/USD futures with bitcoin collateral; thresholds can differ by contract, collateral, and exchange rules. The tutorial is educational and does not provide a full liquidation formula or account for every margin configuration.
Key ideas
- Leverage is the ratio of position size to the collateral supporting it.
- Initial margin is required to open a position, while maintenance margin is needed to keep it open.
- Shared account margin lets positions draw on the same collateral pool, while isolated margin limits collateral to a position or subaccount.
- For a fixed position size, leverage does not change profit, loss, or fees, but it affects liquidation proximity.
- Liquidation occurs before bankruptcy when remaining funds no longer satisfy maintenance requirements.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.