Margin Trading on Binance Futures

Margin Trading on Binance Futures

Table of Contents

On Binance Futures, traders can trade cryptocurrency perpetual and quarterly contracts with leverage between 1x and 125x. Whenever a trader uses the leverage option, he is margin trading, i.e., he uses borrowed funds to enter a position.

Traders who engage in margin trading are using funds provided by a third party. While regular trading accounts operate with a trader’s funds only, margin accounts enable traders to invest greater sums by leveraging positions. In other words, margin trading magnifies trading results so that traders could target larger profits on successful trades. This form of trading has become especially popular in markets with low volatility, such as the foreign exchange. Nevertheless, despite the wild price fluctuations, the cryptocurrency space has also adopted margin trading.

In traditional markets, like forex, stock and contracts for difference (CFDs), the borrowed funds are offered by the broker. On Binance Futures and other cryptocurrency futures platforms, the funds are usually provided by other traders, who are incentivized through an interest payment. Still, some crypto exchanges offer margin funds directly to their users.

How Does Margin Trading Actually Work?

The basic concept of margin trading is simple – a trader is required to commit a certain percentage of the total order amount. This commitment is called margin, and it goes hand in hand with leverage. To put it differently, margin trading accounts enable leveraged trading. The leverage is simply the ratio of the borrowed funds to the margin. For instance, if you want to open a $10,000 trade with 10:1 leverage (the crypto community also uses ‘10x’ to describe this ratio), you would be required to invest $1,000 of your own funds. The rest of $9,000 is invested from borrowed funds.

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The maximum leverage figure varies from market to market and broker to broker, depending on the liquidity and volatility of prices. For example, stock traders shouldn’t expect a leverage ratio higher than 2:1. Elsewhere, forex brokers allow much higher leverage figures, such as 50:1, 100:1, and even 200:1. As for the cryptocurrency space, the leverage ratios for futures contracts range between 2:1 and 100:1. On Binance Futures, the maximum allowed leverage is 125x, but there are special conditions to follow in order to use it.

The great thing about margin trading is that it can be used to go both long and short, depending on the market trend. For those unfamiliar, a long position is a trade whose goal is to profit from the upward movement of the price. Conversely, a short position enables traders to profit from the decline of the price. As soon as the margin position is open, the trader’s investment (or assets) is used as collateral for the borrowed funds. If the traded asset or market moves against the trader above or below a certain threshold (depending on the leverage used), brokers would sell the trader’s assets and close his positions.

Let’s say that you open a short leveraged position. If the price increases significantly, you will be margin called, i.e. required to add more funds to your trading account or close the position manually. If you fail to deposit more funds to reach the minimum margin trading requirement, your holdings can be liquidated automatically. This happens when the total value of a margin account drops below the total margin requirements of a particular broker.

The Good and Bad of Margin Trading

While margin trading definitely has many advantages, it’s imperative to know about the involved risks, so I’ll start by mentioning the negative side of using leverage:

  • Magnified Losses – the main goal of the margin is to multiply potential profits. However, this form of trading is also magnifying losses to the same extent, so you should be very careful when the price goes against you. Sometimes, you can lose more than what you had invested. Nevertheless, Binance Futures usually notifies losing traders beforehand through margin calls.
  • Liquidation – Binance Futures and other cryptocurrency futures trading platforms can liquidate all open positions of a trader in the case when his margin balance falls below the required maintenance margin.
  • Minimum Balance – as mentioned above, you have to keep a minimum balance in your margin trade account. When trading on Binance Futures, this minimum balance figure is called the maintenance margin. If you can’t maintain the minimum balance, you will have to close some or all the positions or add funds to your account.

The good news is that the risks can be minimized with risk management techniques, such as using the stop-limit order.

Obviously, no-one would engage in margin trading if not the advantages. First of all, cryptocurrency traders prefer this form of trading because it can lead to larger profits compared to spot trading. If you don’t have enough funds to open a large position, you can do it through margin trading. Whether the final result is successful or not depends on the applied risk management techniques. In a way, margin trading boosts the purchasing power of an investor.

Besides greater potential profits, margin trading can be used as a diversification tool, as traders can open multiple positions with small amounts of their investment.

Last but not least, with a margin trading account, you can open positions much easier and quicker, without having to move large amounts of money to your account.

Leverage on Binance Futures

As mentioned, Binance Futures traders can benefit from maximum leverage of 125x on perpetual and quarterly contracts. Binance launched its futures trading platform in 2019 and raised the maximum leverage to 125x in October of the same year.

The company said that the high leverage trading was possible thanks to an advanced risk engine and liquidation mechanism. With its fast matching engine, seamless trading experience and risk management tools, Binance Futures offers a competitive advantage in the crypto futures space. The platform applies a unique setup for calculating leverage, which allows continuous margin without bumps. Also, the ‘mark price’ is used to avoid unnecessary liquidations and prevent market manipulation.

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Binance CEO Changpeng Zhao (CZ) said back then:

“Binance Futures offers a fast and stable platform that is designed by traders for traders. We have seen an increase in institutional participation in trading, and these professional traders seek out the most efficient ways to trade very quickly, both in terms of cost and performance. And they are flocking to Binance Futures.”

Source: Binance – Binance Futures Trading Platform Increases Max Leverage to 125x

He added that the performance of Binance Futures systems outstripped many other platforms in the market, providing traders with smooth trading experience.

While the announcement of 125x leverage sparked some criticism on social media, CZ explained that there was a high demand from professional traders, and Binance would always provide the full range of products to choose from. Thus, it is the responsibility of the trader to pick the right leverage ratio. CZ recommended traders to use leverage with caution.

Note that the maximum leverage figure available for users depends directly on the notional value of their trading position. Thus, the larger the position, the lowest is the allowed leverage. Consequently, initial margin deposits are calculated using the leverage picked by the trader. He will have first to select his leverage and then open long or short positions. If the trader doesn’t choose any leverage, it will remain set at 20x, which is the default figure. If he opts for higher leverage, he will have access to smaller notional size of the position.

The platform will automatically show the maximum allowable position size at different leverage figures.

Adjust Leverage - Margin Trading
Source: Binance – Adjust Leverage – Margin Trading

Maintenance margin calculations are carried out via a “Tax Bracket” model, suggesting that the maintenance margin doesn’t depend on the leverage.

It’s worth mentioning that the maintenance margin, and the subsequent liquidation price, is way more advantageous than what you could get from the initial margin. This is because in most cases, the maintenance margin is less than 50% of the initial margin. Thus, the resulting liquidation price is more beneficial for the trader than it would be in the case if the maintenance margin was equal to 50% of the initial margin. In fact, most cryptocurrency futures exchanges use to keep the maintenance margin at 50% of the initial margin, which means a less favorable liquidation price for the trader.

We’d like to reiterate that you should liquidate positions manually before your collateral drops below the maintenance margin to avoid auto-liquidation.

Traders who are cleared via forced liquidation will pay an additional liquidation fee, which is 0.3% on BTC/USDT perpetual contract, 0.5% on 75x futures contracts, and 0.75% on 50x futures contracts. The fee is charged on the amount liquidated only and not on the notional value of the position.

Isolated Margin Trading

At the beginning of 2020, Binance Futures introduced the so-called isolated margin feature. Thus, traders can choose between cross margin and isolated margin. The latter allows users to allocate a specific amount of margin for an open position, whether it’s long or short, and isolate it from the rest of the open positions. This helps the trader enhance risk management, as he can reduce potential losses when the price goes against an open position.

The isolated margin mode makes sure that liquidating an open position will not touch other open positions. Thanks to this new feature, traders can now implement different strategies across multiple open positions. In this way, they can set higher goals for the overall profit and enjoy better risk management. The cross margin mode is maintained so that Binance Futures users could choose between more options.

When Binance launched its futures trading platform in September 2019, it came automatically with the cross margin mode. As mentioned above, the exchange then increased the leverage for its BTC contracts to 125x, so it made sense to introduce the isolated margin mode for improved trading experience. The maximum leverage of ETH, BCH, and other altcoin contracts is 75x.

Aaron Gong, Director of Binance Futures, commented on the introduction of isolated margin:

We spare no effort in ensuring a seamless trading experience for our users while providing them with the best protection and innovative functionalities. We have kept releasing two to three major features on a weekly basis and have witnessed the rapid growth of both retail and institutional traders on Binance Futures trading platform. We keep on listening to the community and are addressing their requests by rolling out new features continuously. “

Source: Binance – Binance Futures Trading Platform Launches Isolated Margin Mode

To switch from cross to isolated margin mode, you should go to the orders section (3) on the trading page, and click on “cross.” A separate menu will pop out so that you could select the isolated margin mode.

Source: Binance - Margin Trading Interface
Source: Binance – Margin Trading Interface

Margin Funding

Investors who are not prepared to trade on margin can benefit from the leveraged trading approach in a less direct way. Binance Futures, as well as some other crypto futures exchanges, is providing a feature called margin funding, which allows users to commit their holdings to fund the margin trades of other users on the platform.

As a general rule, the funding is carried out based on specific terms, while the interest rates are dynamic. If you agree with the terms and take the offer, you will get repayment of the loan with the agreed interest. With Binance Futures, the risks of providing margin funds are quite low, given that leveraged positions can be liquidated by the exchange. It’s worth mentioning that margin funding requires providers to hold their funds in a hot wallet belonging to the exchange.

Bitcoin-Margined Perpetual Future Contracts

On August 10, 2020, Binance Futures launched perpetual futures margined with Bitcoin. The maximum leverage of these new contracts is also 125x. The new type of contract is joining Binance’s wide range of derivatives, including the platform’s initial product – USDT-margined perpetual futures.

In less than a year, Binance Futures has managed to grow in size at an exponential pace. The platform now accounts for a market share of 37%, according to Binance data.  

The new Bitcoin-margined contract is the second futures product to be margined and priced with a cryptocurrency. Previously, Binance Futures launched quarterly futures margined in BTC. Given the variety of derivative products, Binance is delimiting its COIN-margined futures from USDT-margined contracts as follows:

  • COIN-Margined Futures (shown as “COIN-Ⓜ” on the web and mobile app):
    Quarterly futures with quarterly expiration and settlement and leverage of up to 125x;
    Perpetual futures with no expiration and leverage of up to 125x.
  • USDT-margined futures contracts:
    Perpetual futures with no expiration and leverage of up to 125x.

Thus, traders can improve their margin efficiencies in their positions by employing both COIN-margined perpetual and quarterly futures.

Aaron Gong of Binance Futures explained:

“We are the only exchange that offers users flexible control of their margin balance by either spreading it across all their open positions or setting individual limits for each position they own (cross or isolate margin modes), as well as the ability to switch their margin modes at any time. Our users can also choose to hold one direction (i.e. long or short) or both directions at the same time for hedging.”

Source: Binance – Binance Futures Introduces COIN- and USDT-margined Categories

The Final Note

The variety of margin and leverage options on Binance Futures proves why the platform enjoys so much popularity among the crypto community. The customizations on Binance allow traders to enjoy greater diversification in their trading manners.

As of mid-August, Binance CEO Changpeng Zhao (CZ) stressed how fast the platform was growing as we are getting close to Binance Futures’ one-year anniversary. He commented:

As Binance Futures approaches its one-year anniversary, we are encouraged by our users’ response to our platform and products. Shortly after hitting an all-time-high of $13 billion in daily futures volume last month, we crossed the $1 billion mark in open interest last week. Our growth has been steady no matter the market conditions, and that is testament to our users’ trust in us. We will continue to return their trust by building the ecosystem’s most innovative and user-centric products.”

Source: Binance – Binance Launches Perpetual Futures Margined and Priced with Bitcoin

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