When it comes to leveraged trading, there are two main ways traders manage their margin:
- By isolating it for every individual trading order (i.e., isolated-margining)
- Pool all their collateral into a single margin balance and use that to provide a margin for every trade.
In this article, you will learn about the latter and its definition — cross-margining.
What Is Cross-Margin Trading?
Cross-margin trading is an approach to managing trading margins in leveraged trading scenarios.
In essence, it is a risk management strategy that traders employ to spread out their risk when dealing with multiple leveraged positions across one or more assets.
Why is Cross-Margining Important?
To the inexperienced trader, leverage can be a double-edged sword and professionals know that extra care is required when performing it.
A robust approach to risk management is essential for long-term trading success, particularly in cryptocurrency margin trading. That’s why strategies such as cross-margining have been developed.
How Does Cross Margin Work in Crypto Trading
In crypto trading, cross-margin works the same way in other financial markets.
Cross-margin crypto trading combines the margin (i.e., collateral) of all currently open positions on a given margin account. This helps to average the risk between positions and gives each position access to a shared margin balance to protect against early liquidation.
This approach is most often performed on Centralized Exchanges (CEXs) (e.g., Binance, Kraken, Coinbase, and others).
Platforms that allow for margin trading usually offer similar, sometimes identical, tools to manage margin with the two most common options being “Cross Margin” and “Isolated Margin”.
Example of Cross-Margining
Imagine you have $10,000 in your cryptocurrency exchange margin account. You decide to open two cross-margin positions.
The first position is a $100 long position on Bitcoin (BTC) with 10x leverage, and the second position is a $100 long position on Ethereum (ETH) with the same leverage.
For each position, you put up $10 as collateral and borrow $100 from the platform. This means you have a minimum required collateral of $20 for both positions, and the total value of your positions is $200.
In isolated margin trading, if one of your positions incurs losses greater than the value of your collateral ($10), it gets liquidated.
However, with cross-margin enabled, your positions won’t be liquidated unless their losses exceed your total account balance ($10,000), including the already provided collateral and the profit and loss (PnL) of any other open positions.
How to Calculate Cross Margin
As you’ve seen, calculating cross-margin isn’t possible as it is simply a trading approach. However, margin trading as a whole involves a few useful metrics that you should be aware of:
- Margin Balance: The total funds available to be used as collateral on a margin trading account. On cross-margin accounts, this includes the account balance + PnL from open positions + already provided collateral.
- Maintenance Margin: The minimum required collateral to open a leveraged position.
- Margin Ratio: The ratio between your available collateral (Margin Balance) and the minimum required collateral (Maintenance Margin). On cross-margin accounts, when this ratio reaches 100%, all open positions are liquidated.
Cross Margin Risks and Advantages
Cross-margining may sound appealing as a way to maximize one’s ability to recover from unrealized losses, but it is not risk-free.
Positions opened with cross margin expose your entire account balance to losses. If you haven’t set up appropriate stop-loss orders on your open positions, your whole account could be wiped out in a single black swan market event.
However, pooling your collateral using cross-margin can significantly boost your purchasing power if you already have funds tied up in open positions. By allowing you to collateralize new positions with unrealized profits from old ones, cross-margining can unlock your funds to be used quickly when market opportunities appear.
The risk of total liquidation is thus offset by the advantages provided by additional liquidity, making cross-margining a viable strategy for experienced traders.
Cross Margin vs Isolated Margin: What Is the Difference?
The ways and definitions of cross and isolated margin trading differ can be summarized as follows:
Cross Margining:
- Employs the trader’s entire account balance as collateral for all open positions.
- Provides increased flexibility and capital efficiency.
- Permits gains and losses from one position to balance out those from other positions within the same account.
Isolated Margin Trading:
- Allocates a specific amount of margin to each position, thereby segregating the risk linked to that position.
- Offers granular control over risk by preventing losses in one position from impacting others.
Which approach you should choose depends entirely on your broader risk management strategy and how much time you want to dedicate to your crypto day trading. Generally speaking, cross-margining is done more often when trading on longer timeframes, while isolated margin can provide the fine control necessary for rapid day trading.
Final Thoughts on Cross-Margin Crypto Trading
Regardless of your experience level as a crypto trader, if you’re trading with leverage, you will most likely be using cross-margin at some point.
Like many other tools at your disposal, it can serve you well if adopted into an overarching, comprehensive risk management strategy. If used haphazardly without much thought, cross-margining can become a burden and expose you to unnecessary trading risk.
Bank for International Settlements. (2022). “Central Bank Digital Currencies: The Good, the Bad, and the Ugly.” BIS Working Papers, No. 1087. https://www.bis.org/publ/work1087.pdf.
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