Cross Margining: Definition and how it works in crypto?

Cross Margining is a form of margin loan in which all capital and interest will be deposited equally into the account to avoid liquidation. This is a relatively risky form because the entire balance in the participant’s account can be lost if it is liquidated.

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What is Cross Margining?

Cross Margining is a concept used to refer to a form of margin loan. This is a relatively special form of loan where all capital and interest will be deposited equally between accounts. The purpose of doing this is to avoid liquidating all the balance in the account.

On the other hand, in the worst-case scenario, when a liquidation occurs, the user will lose the entire account balance and all open positions. Therefore, choosing to participate in Cross Margining can bring huge risks to investors.

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How does Cross Margining work in crypto?

To describe how Cross Margining works in the crypto market most simply, let’s take the example that you own 10BTC. Accordingly, your moves will be as follows:

• Open a leveraged long position on cryptocurrency A by trading 4 BTC using 2:1 leverage.
• Open a leveraged short position on cryptocurrency B by trading 6 BTC using 2:1 leverage.

From here, there will be many possible cases. The best case is when the value of cryptocurrency A increases and the price of cryptocurrency B decreases. From here it makes a profit for you. On the other hand, when A increases, B decreases or vice versa, A decreases, B increases to a certain extent, you can use the profit on one side to offset the other and keep both positions open.

In the worst-case scenario, when the value of cryptocurrency A decreases and the value of cryptocurrency B increases, this will cause you to lose money. If these losses exceed your total account balance, both positions may be liquidated and you may lose your entire initial account balance of 10 BTC.

Pros and cons of Cross Margining

If you are wondering whether you should use the Cross Margining strategy or not, consider it after reviewing the pros and cons of Cross Margining below.

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Prospects

• Allows the entire investment capital deposited for one position to be used to transfer to another position at will.
• Available balances can be used to add to other accounts.
• Accumulate high exposure to the market when there are many fluctuations, helping to limit losses.

Consequences

• The amount deposited under the Cross Margin method will not be adjusted like the deposit amount of Isolated Margin.
• Very high liquidation rate for investment portfolios that suffer losses if the investment market shows signs of going down.
• A liquidated position can affect all remaining positions.

How to limit risks from Cross Margining?

If you are a new investor, we do not encourage you to use Cross Margining to invest in any market. However, if you still want to try your hand at it, here are some tips to help you limit your risks:

• Set up for yourself an effective capital management mechanism between invested positions.
• Set Stop Loss and Take Profit milestones in advance to avoid liquidation or heavy losses when the market has strong fluctuations.
• Use only small economic levers.
• Consider managing your trading volume to match the amount of capital in your account.

Of course, the above are just small and simple suggestions that do not guarantee profits for you when using cross-margining, so be very careful.

Conclusion

So together we have finished learning all the content and information surrounding the Cross Margining investment form. There is also another similar form called Isolate Margin. And that is the topic that we will learn together in other content from AZcoin.