How margin trading works
Two dominant flavors:
- CEX spot margin — deposit USDT, borrow BTC against it, sell the BTC to effectively short. Interest accrues on the borrow; the position is marked to market against your collateral. Below the maintenance margin, it’s liquidated.
- Perpetual futures — more common in crypto. A synthetic long or short with no expiry. The funding rate mechanism (paid between longs and shorts every 8 hours) replaces the borrow-cost model and keeps the perp’s price pinned close to spot.
DeFi margin looks different: you deposit ETH to Aave, borrow USDC, use that USDC elsewhere. The LTV (loan-to-value) ratio determines how much you can borrow against a given collateral pool. A falling collateral price or a rising borrow balance pushes you toward liquidation; a keeper bot closes the position when LTV exceeds the liquidation threshold.
When margin makes sense
Margin is useful when you have a directional view but limited capital, or when you want to trade a specific catalyst without tying up liquidity. It’s essential for delta-neutral strategies where you hold spot and short perps to isolate yield from price movement. And for on-chain strategies — looping ETH/stETH to amplify staking yield, or borrowing stablecoins against BTC to avoid a taxable sale — margin is the whole mechanism, not an accessory.
Risks and considerations
Margin amplifies both outcomes. The failure modes specific to crypto margin: (1) cross-margin accounts where one bad position drains the rest, (2) funding-rate bleed that turns a “right direction” trade into a net loss, (3) LTV drift on DeFi positions where stablecoin depegs or collateral price crashes can trigger liquidation faster than you can respond, and (4) exchange insurance-fund depletion in extreme moves, which can trigger ADL (auto-deleveraging) that closes profitable positions against the trader’s will. Use margin where the math and discipline are clear; avoid it where the trade “just feels right.”