Introduction to Margin Trading
Margin trading, an advanced strategy, is used by traders to amplify their trading capacity. They use a small amount of funds to manage larger investment positions, a technique known as leverage. To do this, a small amount of cryptocurrency is used as collateral to borrow more funds, which are then deployed in long (buy) or short (sell) positions, effectively magnifying their initial investment. Before diving right into it, here are some key concepts you should get familiar with:
1. Cross and Isolated Margin
2. Borrowing and Interest
3. Long and Short
4. Debt Ratio and Repayment
5. Advantages and Risks
1. Cross and Isolated Margin
KuCoin's margin trading platform offers two modes: cross margin and isolated margin.
1.1 Cross Margin
Cross margin uses all assets in your Margin Account as combined collateral, regardless of type. This boosts capital utilization and reduces liquidation risks. Its main advantage is flexibility—you can borrow across different tokens without needing to swap your existing holdings. You can transfer and utilize all tokens supported by cross margin in your Cross Margin Account. The account is treated as a single position with a unified debt ratio. Cross margin currently supports leverage of up to 5x.
1.2 Isolated Margin
Isolated margin assigns a unique account to each trading pair, segregating trades, risks, and debt calculations. This approach restricts transactions (including transfer, holding, or borrowing) to the two specific tokens of the trading pair. Its main advantage is risk management—issues or risks such as liquidation will have no effect on your other Isolated Margin Accounts. While Isolated margin currently supports leverage of up to 10x, the max leverage for each trading pair differs.
1.3 Cross vs. Isolated Margin
|A single account for all trading pairs
|Separate accounts for each trading pair
|All assets pooled as shared collateral
Collateral limited to the specific coins of each trading pair
|Single debt ratio for the entire account, calculated from all assets and liabilities
Independent debt ratio for each account, based on its specific assets and liabilities Requires manual adjustments
|Shared risk across the account, margin must be adjusted based on overall risk level If liquidation occurs, all assets under the account may be liquidated
|Risk confined to individual accounts Even if one account is at risk of liquidation, other accounts are unaffected
2. Borrowing and Interest
2.1.1 Amount of Borrowable Assets
In cross margin, you can leverage up to 5x, this means you can borrow up to 4x the total assets in the Cross Margin Account. For instance, 10 USDT in your Cross Margin Account allows you to borrow up to 40 USDT, increasing your available funds to 50 USDT. You may also borrow across different tokens. This also means you can hold BTC in your Cross Margin Account and still borrow from other tokens, such as USDT, ETH, and LUNA. You can also choose to manually repay liabilities any time before the due date.
In isolated margin, you can leverage up to 10x. However, the max leverage of each trading pair varies. For instance, with 10 USDT in a BTC/USDT Isolated Margin Account, you can borrow up to 90 USDT, increasing your available funds to 100 USDT. Said isolated margin account can then only borrow BTC for short positions, or USDT for long positions. It cannot borrow tokens outside its trading pair.
2.1.2 Borrowing Method
Choose from two different margin loan methods, Manual Borrow or Auto-Borrow.
Manual Borrow: Assets are manually borrowed from the lending market before making a trade.
Auto-Borrow: The system borrows assets for you when placing orders, based on your set leverage multiplier. The amount required for the trade will be borrowed, and order placement is executed at the same time. This function can be toggled on or off at any time.
Interest is calculated based on the principal sum, daily interest rate, and duration borrowed. You can check your interest records by going to Orders → Margin Orders → Cross Margin/Isolated Margin → Interest, as seen below.
Initial Interest: Upon successful loan. Hourly Interest: After initial interest, it is calculated every hour.
Click the Repay button to pay off the loan with interest. Interest accrues until the principal sum is fully repaid.
The platform charges a fee of 5% on your accrued interest and allocates an additional 10% towards the insurance fund.
3. Long and Short Positions
Long: By buying low and selling high, you profit as the market rises. Take BTC/USDT as an example. If a trader believes that the price of BTC is about to rise, they can go long on their position. This is done by borrowing USDT to buy more BTC. When the price of BTC rises, they then sell off their borrowed BTC to repay their USDT liabilities, and the remaining BTC price spread serves as their profit.
Short: By selling high and buying low, you profit as the market declines. Using the same BTC/USDT example, if the trader instead believes that the price of BTC is about to fall, they can go short on their position. This is done by borrowing BTC to sell, and once the price of BTC falls, they buy back enough BTC to repay their original liabilities, with the remaining BTC price spread serving as their profit.
4. Debt Ratio and Repayment
4.1 Debt Ratio
The debt ratio is a crucial metric in margin trading. It starts at 0% if no digital assets are borrowed. As you borrow assets, the system calculates the debt ratio based on your principal, borrowed assets, and interest. The formula is as follows:
Debt Ratio = Liabilities / Available AssetsWhere,
Liabilities are the sum of borrowed assets plus accrued interest within the specific account. This is calculated as the total of all borrowed assets' market price plus the accrued interest on these assets at market price.
Available assetsare simply the total market price of all assets you hold in said account.
The debt ratio is updated every 5 seconds. A warning is triggered when your debt ratio hits 95%, and KuCoin will send you an SMS or email based on your security settings. Should your debt ratio reach 97%, forced liquidation of your assets will occur. You can check your current debt ratio from both your Margin Account and the margin trading page, whether you're on the web version or using the app.
Debt Ratio Thresholds
|Initial with Max Leverage (Excl. Interest)
Note: You may transfer part of your funds out of your Margin Account only if the debt ratio is below 60%. The lower the ratio, the greater the amount you can transfer. To transfer all funds, make sure to check for liabilities via the Margin Assets page and repay all outstanding debts first.
Low Risk: ≤ 60% debt ratio
Medium Risk: 60-90% debt ratio
High Risk: > 90% debt ratio.
- To lower your debt ratio, consider transferring more assets into your Margin Account.
- Alternatively, repay a portion of your liabilities in advance. Note: Mark price is used to calculate the debt ratio. Leverage trading carries high market risks. While it offers the potential for significant gains, it also poses a risk of substantial losses. Remember, past profits are not indicative of future returns. Severe market volatility could lead to the forced liquidation of your assets. Please note, this information is not financial or investment advice. Your trading decisions should be made independently and at your own risk. KuCoin is not liable for any losses incurred from leverage trading.
4.2.1 Viewing Liabilities
- It's essential to repay what you borrow in the same type of token. For instance, USDT liabilities must be repaid with USDT, and BTC liabilities with BTC. Ensure your margin account has enough of the relevant tokens for repayment. The formula for total liabilities is:
- Liabilities Payable = Borrowed assets + Accrued interest
- You can check both your cross and isolated margin liabilities on the Margin Accountpage.
4.2.2 Repayment Method
- You can manually repay liabilities at any time before they're due. Remember, interest on your loan accumulates hourly, based on how long you've held the loan.
- Interest Calculation:After borrowing, the interest rate is recalculated every hour to align with the current market conditions of capital and liquidity.
- Auto-Repay:If you opt for auto-repayment when placing orders, any cryptocurrency from executed orders that match your debt will automatically pay it off.
5. Advantages and Risks
Margin Trading vs. Spot Trading
1. Collateralizes held assets
|Going long/short to profit in rising/falling markets
Trades only with your own assets
Does not support short selling
Margin Trading vs. Futures Trading
| 1. Collateralizes held assets
2. Can borrow USDT or other coins to magnify trades
3. As margin is shared across coin types, all supported coins can be transferred to the Cross Margin Account as shared collateral
4. Supports more cryptocurrencies
|1x — 10x
| Medium risk
| 1. Each position is independent
2. Collateral is not shared
|1x — 100x
5.2.1 Forced Liquidation and Takeover
Liquidation: Forced liquidation is initiated when the mark price of your assets leads your debt ratio to reach 97%. At this point, all assets in your Margin Account are sold to repay debts.
- Trigger: When Margin Account Debt Ratio ≥ 97%
2.1 Liquidation Process
Notification You'll receive notifications via SMS, email, and in-app or web alerts based on your account settings. Restrictions
i. No new orders are allowed for margin trading pairs
ii. All existing margin trading orders are automatically canceled
iii. No tokens can be transferred in or out of the margin account during liquidation
- Post-Liquidation: The system takes over the closing of positions and debt repayment. In cases of residual balance, a small fee (about 1% of total position value) is charged as risk mitigation for negative balances. Any funds still remaining afterwards will be returned to your account in USDT or the equivalent liquidated tokens.
5.2.2 Risk Warning
Be aware of the risks that come with margin trading, and manage your positions promptly to avoid losses. You are responsible for any losses incurred due to forced liquidation, which often results from rapid market fluctuations that elevate the debt ratio of an account to 97%. Proactive measures, such as setting up stop-losses and take-profits, are crucial for risk control.
Ideal Candidates for Margin Trading
1. Institutions or experienced traders
2. Spot traders seeking leverage profits
3. Quantitative API traders
4. Individuals with higher risk appetites
Margin trading is favored in the cryptocurrency world for its ability to use small funds for potentially large returns. Understanding its principles and operations is key to success.
With that said, it's important to never overlook proper risk management. Increasing investments for higher profits can backfire, especially in volatile markets. KuCoin strongly advises setting up stop-losses and take-profits to manage your own risks effectively.