So you want to try crypto margin trading. 

Before you do, assess your risk tolerance and basic investing strategy.

It allows you to better understand whether to do cross margin or isolated margin trading.

This article will discuss the difference between the two.

A short comparison between regular (spot) trading and margin trading however, provides a helpful starting point.

Spot trading versus margin trading

Conservative or beginner traders are better suited for spot trading while margin trading is for traders comfortable with more risk.

Why?

You incur gains or losses only when you decide to sell your crypto asset with spot trading. There is no danger of losing your entire investment, unless the project goes to zero.

Margin trading however could provide larger gains, depending on your leverage. At the same time, you can also stand to lose everything if your position gets liquidated.

Spot trading is a straightforward acquisition of crypto. You own the asset instantly upon purchase. You will only be affected by changes in its price when you sell it.

On the other hand, there is no ownership involved in margin trading. You invest to benefit from the crypto asset’s price changes based on higher volumes.

This is made possible from the collateral or margin you initially put in to participate in such trade.

Such margin is the funds required to attain a leveraged position. It allows you to borrow large amounts of crypto to benefit from its gains or suffer its losses.

If you’re not looking to own the asset, then margin trading might be for you. You should also have a better understanding of how to navigate price changes.

Now that we’ve made this necessary comparison, let’s now discuss the difference between cross margin and isolated margin.

Cross margin

The thing to remember about cross margin is that it involves the entire balance in your margin trading account. This balance acts as shared collateral for all your open positions.

Any unfavorable movement in one position will activate the margin of the entire account to cover losses.

Traders who want to maximize the use of their available funds employ this type of risk management. The risk of liquidation for individual positions is minimized since you can draw on your entire account balance. 

This typically supports a higher form of leverage since the collateral is pooled.

Even if the likelihood of individual liquidation is less, the risk to all your positions is still present. This happens when the market moves significantly against you.

Always make sure that your account value does not drop too low. Otherwise, all your positions automatically close at the same time.

Isolated margin

This form of margin trading confines the collateral to a specific position. In effect, only the allocated margin for such a position is at risk of liquidation.

The separate collateral for each position confines the risk to individual trades.

Isolated margin trading is preferred by traders who want to manage the risk on a per position basis. Control is more precise over potential losses.

Leverage limits in this case, would be more conservative since each position is individually collateralized.

When it comes to liquidation, only the margin for a specific position will be affected. The remaining balance of your entire margin trading account will stay untouched. 

Comparing the two

The main difference between cross margin and isolated margin is in the degree of risk control.

Cross margin can put your entire margin trading account at risk. Isolated margin only affects a specific portion of it.

When it comes to flexibility of fund usage, then cross margin has the advantage. It allows for better capital efficiency as all the funds in the margin account are utilized.

The risk to the account may be higher. However, the chance for liquidation is lower.

This is because the entire balance supports the individual positions.

Isolated margin has the advantage when it comes to risk control because exposure is limited to individual positions. It makes it easier to manage and monitor separate positions.

It is at a disadvantage however when it comes to fund usage efficiency.

Funds could be locked up in individual positions making it inaccessible for other trades that may need additional funding. The risk of liquidation is higher for specific positions when not enough margin is available.

Choose wisely

Choosing between cross margin and isolated margin depends on the trader’s risk tolerance, strategy and overall trading goals. 

Those with a higher risk tolerance are better suited for cross margin. 

When it comes to trading strategy, those who want to focus on specific positions should choose isolated margin trades.

It really depends on your overall trading goals which will highly influence your choice between the two.