What is the relationship between leverage and margin?
All kind of tradings and investments include 2 aspects: profit & loss, and risk management. The leverage is the main tool to weigh these two aspects. On BIB, the main function of the leverage is to adjust the initial margin rate used for your position. The margin, can be seen as collateral. It means how much risk the trader is willing to take on this particular investment.
The higher the leverage, the less the margin used. With the same amount of margin, traders can open a bigger-sized position and amplify their profits from the increased position size. But at the same time, the liquidation price of the position will be more prone to the entry price, meaning, the position is easier to be liquidated as there is not much room for the loss.
The lower the leverage, the more the margin used. With the same amount of margin, the position size that a trader could open might be relatively limited. Traders may not amplify the gain from larger position size. However, the liquidation price of the position will be further away from the entry price, meaning, the position will not be liquidated easily as there is a larger room for the loss.
BIB Adopts 2 Margin Systems
There are two margin modes on BIB: Isolated margin mode and Cross margin mode.
What is the Isolated Margin mode?
The isolated margin mode depicts the margin placed into a position is isolated from the trader's account balance. This mode allows traders to manage their risks accordingly as the maximum amount a trader would lose from liquidation is limited to the position margin placed for that open position.
For example, a trader opens a quantity of 1500 BTCUSDT position at $10,000 by using 1x leverage. The initial margin used to open the position is 0.15 BTC. Now, he changes the leverage to 3x. The initial margin required (collateral) will then change from 0.15 BTC to only 0.05 BTC. In the event of liquidation, he will only lose the 0.05 BTC initial margin (excluding fees). This allows the trader to limit his risk.
BTC initial margin (excluding fees). This allows the trader to limit his risk.
What is the Cross Margin mode?
It is the default margin mode on BIB. The cross margin mode uses all of a trader’s available balance within the corresponding trading pair coin type to prevent liquidation. When the trading pair's equity is lower than the maintenance margin, the position will be liquidated. In the event of liquidation, the trader will lose all his/her equity for that particular trading pair.
For example, a trader opens a BTCUSDT position. When the BTCUSDT position is liquidated, he will lose all of his USDT balance. BTC balance will not be affected.
Let's take a look at the number of positions that can be opened with different leverage multiples. Take BTCUSDT as an example:
A trader selects cross margin mode, the initial margin to use is 1,000USDT, and the number of contracts purchasable with 100x, 50x and 10x leverage at a price of 30,000USDT is as follows:
100 times leverage: number of contracts =1000x100/30000=3.333 BTC
50 times leverage: number of contracts =1000x50/30000=1.666 BTC
10 times leverage: number of contracts=1000x10/30000=0.333 BTC
From the above example, we can see that the lower the leverage used under cross margin mode, the smaller the position size that can be opened.
* Contract quantity = initial margin x leverage/entry price
Will the modification of the leverage of the position affect the liquidation price of the position under cross margin mode?
Under cross margin mode, the liquidation price of the position will only change when the available balance of the account, the position size, the entry price of the position or the risk limit of the account is changed. Otherwise, the liquidation price will remain unchanged.
The liquidation price changes under the cross margin mode are mainly divided into the following three situations:
- The trader only holds a single position and does not hold any activity orders.
In this case, the liquidation price will not be affected. This is because under cross margin mode, when the trader modifies the leverage, the number of positions, the entry price and the total amount of assets used to support the position remain unchanged. - The user only holds a single position and active orders at the same time.
In this case, the liquidation price of the position will be affected. When the leverage is increased, the initial margin occupied by the activity order will be reduced, so more margin can be released, and the increased available balance can be used to support the position. If the leverage is reduced, the opposite will occur, because more initial margin is required for active orders. - The user holds multiple positions that share the same assets, such as USDT trading pairs that use USDT as margin.
In this case, modifying the leverage will affect the liquidation price because the initial margin required for the positions will increase or decrease with the adjustment of leverage. When the leverage of one of the positions is increased, the margin required for that position is reduced, and this part of the margin will be released to support other positions; and when the leverage of one of the positions is decreased, the position requires more initial margin. Reducing the available balance of the account, which will move the liquidation price of other positions closer to the mark price, thereby increasing the risk of liquidation of the position.
How does leverage affect the unrealized P&L?
In fact, the leverage will not affect the unrealized P&L. When leverage is adjusted for a position, the initial margin requirements will change while the position size (QTY) remains unchanged. The main function of applying leverage is to determine the initial margin rate required to open your position. The unrealized P&L will not be amplified when traders change the leverage.
However, as mentioned above, how traders can benefit from using higher leverage is that they are able to open a larger position size under the same amount of margin. Hence, The unrealized P&L will be amplified from the increased Position Size but NOT from the increased leverage.