Cross margin is the most common form of margin trading and it is usually the default mode on most trading platforms. Also known as spread margin, this mode uses the entire amount in the available funds as collateral for trades. This means that when a position moves against a trader and another moves in their favor, the profit from the beneficial trade can be used to cover the loss, keeping the trader’s position open for longer periods.

Unlike isolated margin which allows a trader to open multiple isolated margin accounts, a trader can only open one cross-margin account on their crypto trading account. The margin level is calculated based on the total assets and total debt in the cross-margin account. At extreme market conditions, the trading platform sends margin calls to the trader signifying potential liquidation or the need for closing a position or adding more funds to keep the positions open.

Let’s explore how cross-margin works. For example, a trader has 10 BTC and decides to open a leveraged Long position on ETH and another leveraged Short position on ADA. For ETH, the trader allocates 4 BTC and the remaining 6 BTC to ADA, both at 2x leverage.

Imagine that the price of ETH drops leading to a loss on the Long position, and the price of ADA drops too leading to a profit on the Short position, the profit from ADA can cover for the loss from ETH, keeping both positions open. However, if the price of ETH drops significantly and the price of ADA increases, this is a loss on both positions and if this loss exceeds the maintenance margin, both positions can be liquidated and the trader loses the total 10 BTC balance offered as collateral. This is very different from isolated margin trading where only the allocated amount is affected.

Pros and Cons

The following are the upsides and downsides of cross-margin trading:

Pros	Cons
Cross margin provides fluidity and allows traders to automatically use the available balance to prevent liquidation	If the market moves substantially unfavorably against the trader’s prediction, there is a risk of total liquidation
It allows for hedging because gains in a trading pair can be used to offset losses in others and keep positions open for longer periods	There is lesser control over individual trades because the margin has already been shared among all trading pairs
There is a lower risk of premature liquidation because a larger pool of funds can offset margin requirements	Because of the ease of leveraging multiple positions using cross-margin, traders can be tempted to over-leverage
Multiple trades can be easily managed using a single cross-margin account	It is hard to calculate the total risk exposure at a glance because there are multiple positions with unique market dynamics

Conclusion

With cross margin, traders can gain higher profits. However, it also presents a risk of losses and liquidation. The choice boils down to the trader’s preference, trading strategy, risk tolerance, and level of active involvement in the trade. To be successful in crypto trading, traders have to understand the dynamics involved in each trading mode to make informed decisions. A well-informed trader who understands the intricacies of both margin types will be better equipped to navigate the volatile world of cryptocurrency.

Cover image source: Coinmarketcap