What is crypto margin trading?

Margin trading is the act of borrowing money to trade financial assets, using existing capital as collateral.

In the cryptocurrency market, margin trading allows traders to:

• Open long positions (profit from rising prices)
• Open short positions (profit from falling prices)
• Use leverage ratios (e.g. 2x, 5x, 10x)
• Increase capital efficiency while accepting higher risk

Margin trading is available on many cryptocurrency exchanges through a dedicated margin account, which is separate from spot trading accounts.

Crypto margin trading uses borrowed funds to trade the spot market, meaning traders buy or sell the actual cryptocurrency with leverage. Borrowed funds accrue interest, and positions are subject to margin calls and liquidation.

Futures and perpetuals are derivative contracts, not spot trades. Traders do not own the underlying asset, and instead trade price exposure using contracts that rely on funding rates rather than interest.

In short, margin trading is leveraged spot trading, while futures/perps are leveraged derivatives, often with higher leverage and risk.

A common misconception is that margin trading and futures trading are the same because both use leverage. While both amplify exposure, they work differently.

In margin trading, traders borrow funds to trade the spot market and may own the underlying asset. In futures and perpetuals trading, traders do not own the asset and instead trade derivative contracts that track price movements.

Margin (collateral) is the capital a trader deposits to secure a leveraged position. It acts as a safety buffer for borrowed funds and determines how much leverage a trader can use. If losses reduce this collateral too far, the position may be liquidated.

Margin trading is the trading activity that uses that collateral to borrow funds and open leveraged positions in the market. It refers to the overall process of trading with leverage, including borrowing, interest or funding costs, margin requirements, and liquidation risk.

In short, margin is the collateral, while margin trading is the practice of using that collateral to trade with leverage.

To understand how crypto margin trading works, consider a simple example.

A trader deposits $1,000 into a margin account and chooses 5x leverage to trade Bitcoin. This $1,000 acts as the initial margin. Using leverage, the trader borrows an additional $4,000 from the exchange, creating a $5,000 position.

The trader opens a long position, expecting Bitcoin’s price to rise. As long as the trade moves in their favor, the account equity increases. If Bitcoin rises by 10%, the position gains roughly $500, minus interest and fees.

However, if the price moves against the trader, losses reduce the margin balance. If losses cause the account equity to fall below the maintenance margin, the exchange issues a margin call. If the price continues to fall and the margin level drops too low, the exchange will liquidate the position to prevent further losses.

The trade ends when the trader closes the position manually or it is liquidated by the exchange, at which point borrowed funds are repaid and any profit or loss is realised.

Here’s an introduction to the key concepts you need to be familiar with to margin trade. See the end of the article for a full cheat sheet which you can refer to in future.

The initial margin is the amount of capital required to open a margin position. For example, with 5x leverage, a trader must provide 20% of the total position value.

The maintenance margin is the minimum equity required to keep a position open.
If equity falls below this level, liquidation risk increases.

Most exchanges calculate margin level using the following formula:

Margin level = (equity ÷ used margin) × 100

When the margin level drops below a predefined threshold, liquidation occurs.

A margin call is a warning from the exchange that additional funds are required to maintain an open position.

The liquidation price is the price at which the exchange forcibly closes a position to prevent further losses.

A long position is opened when a trader expects the cryptocurrency price to rise. The trader borrows funds to buy more of the asset and sells later at a higher price.

A short position is opened when a trader expects prices to fall. The trader borrows the asset, sells it immediately and repurchases it later at a lower price.

Isolated margin limits risk to a single position. Only the margin allocated to that trade can be liquidated. Liquidation of one trade cannot affect other trades.

Best for:

• Risk control
• Multiple independent trades

Cross margin shares margin across all open positions in a margin account. Losses in one position can affect all positions.

Best for:

• Capital efficiency
• Reducing liquidation during short term volatility

Margin trading, spot trading and futures trading differ in how leverage ownership and risk are handled.

Margin trading can be used strategically to achieve specific trading objectives, but it should always be approached with risk management in mind.

Margin trading allows traders to open short positions by borrowing an asset and selling it at the current market price. This strategy is commonly used when a trader expects prices to fall or when broader market conditions are bearish.

Margin trading can be used to hedge spot holdings. For example, a trader holding Bitcoin long-term may open a short margin position to offset potential short-term downside, without selling their underlying assets.

By using leverage traders can allocate less capital to a position while keeping funds available for other opportunities. This strategy is often used by experienced traders managing multiple positions across different assets.

Margin trading enables traders to go long on one asset and to short another simultaneously. This approach aims to profit from relative price movements, rather than overall market direction — which reduces exposure to broad market volatility.

Margin trading can be used for short-term trades where traders aim to capture small price movements with limited capital commitment. This strategy relies on precise entry-exit timing and strict loss limits.

All margin trading strategies involve liquidation risk, interest costs and heightened volatility exposure. Leverage should be used conservatively and positions should always be monitored closely.

Crypto margin trading is a powerful tool that allows traders to increase exposure, trade both rising and falling markets, and deploy capital more efficiently. However, the use of leverage introduces significant risks including liquidation, margin calls and amplified losses.

For most traders, margin trading should be approached as a strategic supplement to spot trading rather than a replacement. A clear understanding of margin mechanics, disciplined risk management and conservative use of leverage are essential for using margin trading effectively in the cryptocurrency market.

No. Margin trading is generally not suitable for beginners due to high liquidation risk and complexity.

Margin trading is popular because it allows traders to amplify returns, short assets and use capital more efficiently.

Yes. Kraken Pro offers margin trading for eligible users subject to jurisdiction and account verification.

Check out this article for more information on getting started with margin trading.