Coin-Margined Trading

Coin-margined trading is a way of trading crypto derivatives, mainly futures and perpetual futures, in which the trader posts margin, and receives profits or pays losses, in a cryptocurrency such as bitcoin or ether rather than in US dollars or a stablecoin. A bitcoin coin-margined contract is priced in dollars but settled in bitcoin. Such contracts are often called inverse contracts, because the trader's profit in coin terms depends on the inverse of the price.

Coin-margined contracts were the original format of crypto derivatives, popularised by the exchange BitMEX, whose inverse bitcoin perpetual swap launched in 2016. The main alternative is USDT- or USDC-margined trading, also called linear or stablecoin-margined trading, where margin and profit are in a stablecoin such as Tether. Most large exchanges offer both, and the choice affects how a position behaves when prices move.

Imagine betting on the price of gold, but having to place your deposit in gold bars and getting paid in gold bars. If gold goes up and you bet on a rise, you win twice over: you earn more bars, and every bar you already hold is worth more. If gold falls, you lose twice over: you lose bars, and the bars you still hold are worth less.

Coin-margined crypto trading works the same way. The deposit and the winnings are in bitcoin, not dollars. That suits people who already hold bitcoin and want to measure everything in it, or who want to protect a bitcoin pile against a fall. It can be risky for someone betting on a rise, because their deposit shrinks in value at exactly the moment their bet goes wrong.

In a typical inverse contract, each contract is worth a fixed number of dollars, such as $100, but the trader's account is kept in bitcoin. The profit or loss on a long position, measured in bitcoin, is:

• $Q$ is the position size in US dollars (number of contracts times the dollar value of each).
• $P_{\text{entry}}$ is the bitcoin price when the position was opened.
• $P_{\text{exit}}$ is the bitcoin price when it was closed.

For example, a trader opens a long position of $10,000 at a price of $50,000 and closes it at $60,000. The profit is 10,000 × (1/50,000 − 1/60,000) = 10,000 × (0.00002 − 0.0000167) ≈ 0.0333 BTC, worth about $2,000 at the exit price. A short position gives the same result with the sign reversed. Because the payoff in bitcoin is not a straight line in price, gains on longs shrink in coin terms as the price rises further, while losses on shorts grow quickly in a strong rally.

The two formats differ in several ways:

• Margin currency. Coin-margined accounts hold the underlying coin; stablecoin-margined accounts hold USDT or USDC.
• Payoff shape. Stablecoin-margined (linear) contracts pay a fixed dollar amount per dollar of price move; inverse contracts do not.
• Collateral risk. In coin-margined trading, the value of the collateral moves with the market, adding exposure on top of the position itself.
• Multiple markets. Stablecoin margin can be shared across many different coins' contracts, while coin margin usually serves only contracts on that coin.

Coin-margined contracts are popular with miners and long-term holders who earn and account in bitcoin. A holder who opens a short coin-margined position equal to their holdings in dollar terms can lock in the dollar value of their bitcoin, a form of hedging, without converting to a stablecoin. Traders who expect bitcoin to outperform the dollar over time may also prefer to keep all balances in coin. Basis traders use coin-margined futures to capture the gap between futures and spot prices, and the funding rate on inverse perpetuals is also paid in coin.

The main risk of coin-margined trading is the double exposure on long positions. A leveraged long position backed by bitcoin loses value both through the losing trade and through the falling value of its collateral, so its liquidation price is reached faster than an equivalent stablecoin-margined position. This can feed cascading liquidations in a sharp sell-off. As with all margin trading, high leverage magnifies losses, and the nonlinear payoff can surprise traders used to linear contracts. Exchanges also apply their own initial margin and maintenance rules, which may change during volatile periods, and offshore platforms may offer limited protection if they fail. A related, more flexible approach to sharing margin across positions is described under cross-margining.