What is the relationship between leverage and margin?
All kind of trading and investments includes 2 aspects: profit & loss, and risk management. The leverage is the main tool to weigh these two aspects. On Bybit, the main function of the leverage is to adjust the initial margin rate used for your position. The margin, can be seen as collateral. It means how much risk the trader is willing to take on this particular investment.
The higher the leverage, the less the margin used. With the same amount of margin, traders can open a bigger-sized position and amplify their profits from the increased position size. But at the same time, the liquidation price of the position will be more prone to the entry price, meaning, the position is easier to be liquidated as there is not much room for the loss.
The lower the leverage, the more the margin used. With the same amount of margin, the position size that a trader could open might be relatively limited. Traders may not amplify the gain from larger position size. However, the liquidation price of the position will be further away from the entry price, meaning, the position will not be liquidated easily as there is a larger room for the loss.
Bybit Adopts 2 Margin Systems
There are two margin modes on Bybit: Isolated margin mode and Cross margin mode.
What is the Isolated Margin mode?
The isolated margin mode depicts the margin placed into a position is isolated from the trader's account balance. This mode allows traders to manage their risks accordingly as the maximum amount a trader would lose from liquidation is limited to the position margin placed for that open position.
For example, a trader opens a quantity of 1500 BTCUSD position at $10,000 by using 1x leverage. The initial margin used to open the position is 0.15 BTC. Now, he changes the leverage to 3x. The initial margin required (collateral) will then change from 0.15 BTC to only 0.05 BTC. In the event of liquidation, he will only lose the 0.05 BTC initial margin (excluding fees). This allows the trader to limit his risk.
What is the Cross Margin mode?
It is default margin mode on Bybit. The cross margin mode uses all of a trader’s available balance within the corresponding trading pair coin type to prevent liquidation. When the trading pair's equity is lower than the maintenance margin, the position will be liquidated. In the event of liquidation, the trader will lose all his/her equity for that particular trading pair.
For example, a trader opens a BTCUSDT position. When the BTCUSDT position is liquidated, he will lose all of his USDT balance. BTC balance will not be affected.
Is cross margin and isolated margin interchangeable when having an open position?
Traders can always change the margin mode from the order zone. When a margin mode is changed, it will be applied to the opened position and any active & conditional order. Any margin changes made will affect the liquidation price of the position. Hence, cross margin and isolated margin are interchangeable anytime whenever the account has a sufficient margin and the change itself doesn't trigger immediate liquidation.
Can trader change Leverage under Cross Margin mode? How to calculate Initial Margin and Maintenance Margin under Cross Margin mode?
Under cross margin mode, traders can set their own leverage.
For new users who have registered since Aug. 9, the system will use 10x leverage to calculate the initial margin by default. Take the BTCUSDT perpetual contract as an example, the initial margin used to trade this contract is its contract value/10, that is, the maximum number of contracts that can be opened in your account will be calculated by default using 10x leverage.
If a trader wish use other leverage multiples, traders can click "cross margin" in the order zone and adjust the leverage by sliding the leverage indicator bar or manually entering the leverage multiple.
For users who registered before Aug. 9, the system will still use the maximum leverage allowed under the current risk limit to calculate the initial margin by default. For example, the BTCUSDT perpetual contract allows the use of a maximum leverage of 100x under the minimum risk limit. The initial margin used to trade this contract is its contract value/100, that is, the maximum number of contracts that can be opened in your account will be calculated by default using 100x leverage.
Let's take a look at the number of positions that can be opened with different leverage multiples. Take BTCUSDT as an example:
Traders selects cross margin mode, the initial margin to use is 1,000USDT, and the number of contracts purchasable with 100x, 50x and 10x leverage at a price of 30,000USDT is as follows:
100 times leverage: number of contracts =1000x100/30000=3.333 BTC
50 times leverage: number of contracts =1000x50/30000=1.666 BTC
10 times leverage: number of contracts=1000x10/30000=0.333 BTC
From the above example we can see that the lower the leverage used under cross margin mode, the smaller the position size that can be opened.
* Contract quantity = initial margin x leverage/entry price
The calculation of the maintenance margin is the same for cross margin mode and isolated margin mode. i.e. maintenance margin = position value * maintenance margin rate.
Will the modification of the leverage of the position affect the liquidation price of the position under cross margin mode?
Under cross margin mode, the liquidation price of the position will only change when the available balance of the account, the position size, the entry price of the position or the risk limit of the account are changed. Otherwise, the liquidation price will remain unchanged.
The liquidation price changes under the cross margin mode are mainly divided into the following three situations:
- The trader only holds a single position and does not hold any activity orders.
In this case, the liquidation price will not be affected. Because under cross margin mode, when the trader modifies the leverage, the number of positions, the entry price and the total amount of assets used to support the position remain unchanged.
- The user only holds a single position and holds active orders at the same time.
In this case, the liquidation price of the position will be affected. When the leverage is increased, the initial margin occupied by the activity order will be reduced, so more margin can be released, and the increased available balance can be used to support the position. If the leverage is reduced, the opposite will occur, because more initial margin is required for active orders.
- The user holds multiple positions that share the same assets, such as USDT trading pairs that use USDT as margin.
In this case, modifying the leverage will affect the liquidation price. Because the initial margin required for the positions will increase or decrease with the adjustment of leverage. When the leverage of one of the positions is increased, the margin required for that position is reduced, and this part of the margin will be released to support other positions; and when the leverage of one of the positions is decreased, the position requires more initial margin. Thereby reducing the available balance of the account, which will move the liquidation price of other positions closer to the mark price, thereby increasing the risk of liquidation of the position.
How is the effective leverage calculated under the cross margin mode?
The effective leverage is calculated based on the trader’s position value as compared to the maximum possible loss of the position.
Cross margin with unrealized profit:
Effective leverage= Position Value / (Position margin+Available balance + Unrealized Profit)
Cross margin with unrealized loss:
Effective leverage= Position Value / (Position margin+Available balance)
*Available balance= wallet balance - position margin-total order margin
The higher the effective leverage, the higher the risk of liquidation, as the liquidation price is closer to the mark price.
How does leverage affect the unrealized P&L?
In fact, the leverage will not affect the unrealized P&L. When leverage is adjusted for a position, the initial margin requirements will change while the position size (QTY) remains unchanged. The main function of applying leverage is to determine the initial margin rate required to open your position. The unrealized p&L will not be amplified when traders change the leverage.
However, as mentioned above, how traders can benefit from using higher leverage is that they are able to open a larger position size under the same amount of margin. Hence, The unreal P&L will be amplified from the increased Position Size but NOT from the increased leverage.
Please refer to “Does Leverage Affects Your Unrealized P&L?” for more detailed explanation.
How does leverage used affect ROI?
Despite the unrealized P&L is unaffected after the leverage changed, traders will observe changes on the unrealized P&L% (ROI%).
Under Isolated mode:
Unrealized P&L% = Unrealized P&L /(initial margin + fee to close + additional margin added to position) x 100%
Under Cross margin mode:
Unrealized P&L% = Unrealized P&L /(initial margin + fee to close) X 100%
An increase in leverage will reduce the initial margin required or vice versa. Thus with the same unrealized P&L, traders will see an increase in unrealized P&L% due to a reduction in the position margin and not because of an increase in actual profits.
For more information, please refer to: