There’s no denying risk is an aspect of trading digital assets, but thankfully, many tools and mechanisms exist to manage the unpredictability of crypto price swings. One in particular is cross margining, a widely accessible risk management option on spot and derivative crypto exchanges. Proponents of this strategy say it can provide portfolio protection from the crypto market’s price volatility. But it can also expose crypto traders to significant losses if they’re unaware of how it works and the consequences of an unfavorable trade.
Let’s explore the intricacies of cross margining and how it helps crypto traders manage their portfolios safely.
What is cross margining in crypto trading?
Cross margining is a technique where traders use their entire account balance as collateral for opening and maintaining multiple crypto positions. In cryptocurrency margin trading, exchanges let users increase their portfolios’ sizes with tools like leverage, but traders must have a predefined percentage of collateral (or margin) in their account to open and keep these trades.
Here, the initial margin is the amount traders need to open new positions, while the maintenance margin is how much collateral traders need to maintain their crypto portfolio. With cross margining, traders use the money "across" their accounts to meet these initial and maintenance margin requirements.
As a cross margining example, imagine a crypto derivatives trader has a futures margin account with a balance of $15,000. In a cross margin profile, the trader uses the entire $15,000 as collateral for positions in futures contracts for Bitcoin (BTC), Ethereum (ETH), or other crypto futures instead of setting aside specific margin amounts for each separate trade. In this example, if a trader wants to enter a leveraged long BTC position with an initial margin requirement of $5,000, they’d use the entire $15,000 as collateral and have a $10,000 buffer.
This additional cash provides extra security and flexibility, but it also puts the whole portfolio at risk of liquidation should Bitcoin’s price fall below the maintenance margin requirement.
Cross margin versus isolated margin
Isolated margin is an alternative risk management strategy where traders only allocate and maintain the collateral requirements for individual positions. Unlike cross margining, traders using isolated margin don’t put their entire portfolio at risk of liquidation. Instead, isolated margin restricts the margin requirements to each position, so traders only lose the collateral they put into separate trades.
Circling back to the previous example, suppose the crypto trader with a $15,000 account used isolated margin rather than cross margin to open a Bitcoin margin trading position with a $5,000 initial requirement. Here, although there’s $15,000 in this trader’s account, they can’t lose more than $5,000 if BTC drops below the maintenance margin threshold.
Why use cryptocurrency cross margin trading?
Cross margining is frequently labeled a risk management strategy since it increases a trader’s available collateral, giving them a larger buffer zone to preserve leveraged positions and avoid liquidation. This is a major feature, but crypto traders also routinely employ cross margining strategies for other reasons. Here are a few:
- Risk mitigation: Cross margin trading doesn’t eliminate liquidation risk but gives traders more wiggle room to avoid margin calls. Using the entire account balance as collateral gives traders more capital to fund positions and withstand short-term market fluctuations. Plus, if traders have winning positions, these gains help absorb potential losses in losing trades.
- Access to leverage: The larger size of collateral in cross margin accounts also boosts the capital efficiency in a crypto trader’s portfolio. Traders using cross margining can access more margin to potentially maximize their profits using tools like leverage.
- Convenient and easy to understand: Some crypto traders find monitoring collateral requirements for cross margin simpler than isolated margin since the former only involves one account. Instead of reviewing shifting prices on individual positions, cross margin traders only ensure their entire portfolio remains above their exchange’s initial and maintenance margin requirements.
What are the risks of using cross margining?
Cross margining has positive attributes like increased flexibility and capital efficiency, but it’s not without challenges.
The primary risk is that cross margining places a trader’s entire portfolio on the line if their positions move in an unfavorable direction. Once the collateral in a cross margin account falls below the maintenance margin requirement, traders lose everything instantly.
Another potential con is the increased temptation to over-leverage positions to amplify gains. Since cross margin portfolios have access to more capital (thanks to the large collateral size), accessing more borrowed funds is easier. This heightened leverage potential rewards traders if their trading strategy turns out perfectly, but it exposes them to more significant downside pressure—and a greater likelihood of liquidation—if the value of these positions goes below their maintenance margin.
Strategies to manage risk with cross margining
Because cross margining puts a trader’s portfolio in a vulnerable position, learning trading strategies and safety techniques to avoid a worst-case scenario is crucial. Here are a few practical techniques to help preserve capital, even in unfavorable market conditions.
Define risk and reward
The first step is to weigh the potential risks and returns and define the parameters for entering and exiting a trade. Include factors like the expected time horizon and precise price levels to buy and sell a digital asset to clearly define the maximum loss potential and avoid making hasty or irrational decisions.
Employ technical analysis
One easy way to determine the "best" prices to enter and exit trades is to use technical analysis tools when studying crypto price charts. Looking for price chart patterns and technical indicators helps identify crucial support areas and resistance for digital assets, revealing attractive levels to take profits or get out of a losing trade. Research technical charting tools and patterns to spot these crucial zones and gain greater insights into market sentiment when setting up trades.
Use automatic order types
After defining critical price levels for a crypto trade, set automated buy and sell orders such as take-profit orders and sell stop-market orders to take emotion out of decision-making. These orders automatically fill after they hit a predefined price, preventing traders from being exposed to margin calls and liquidation.
Stay updated and set up price alerts
Cryptocurrency prices move constantly and unexpectedly, and day traders need ways to stay up-to-date on the latest market dynamics. Check reputable crypto news websites and social media channels for the latest information, and consider tweaking a trading strategy after hearing recent reports. Also, set push notifications for price targets on crypto assets to monitor portfolio performance, take advantage of market weakness, or prepare for margin calls.
Cross margin crypto perpetuals with dYdX
For eligible traders, dYdX offers cross margin trading by default for the dozens of crypto perpetual swaps on our decentralized exchange. Since cross margining spreads the margin requirements across multiple positions, eligible traders enjoy maximum capital efficiency when setting up trades and managing their leverage exposure. For more details on dYdX’s features, products, and services, visit our official blog. Also, check out dYdX Academy for more expert crypto trading tutorials, and eligible traders can start trading on dYdX today.
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