Deepening Understanding of Coin-Margined Contracts: Margin Mechanisms and the Secrets of Risk-Free Arbitrage

Cryptocurrency futures contracts based on the coin itself are an important tool in crypto derivatives. Their unique margin calculation method and liquidation mechanism give traders advantages that traditional USD-based contracts lack. Unlike USD-denominated contracts, which are priced in dollars, coin-margined contracts revolve entirely around the digital asset itself. This design fundamentally changes the logic of risk management.

Coin-Margined vs. USD-Margined: Why Coin-Margined Contracts Naturally Have a Long Bias

The first step to understanding coin-margined contracts is recognizing their fundamental difference from USD-margined contracts. Trading USD-margined contracts requires converting fiat currency into stablecoins like USDT before trading. In contrast, traders in coin-margined contracts often already hold the digital asset in spot, using the coin itself as collateral to open positions.

Coin-margined contracts inherently carry a long bias because of their margin characteristics. When you use $10,000 worth of Bitcoin as collateral to open a position, a rise in Bitcoin’s price directly increases your margin value, boosting your risk capacity. Conversely, a price drop decreases the dollar value of your margin. This feature makes coin-margined contracts naturally inclined toward a bullish stance.

Arbitrage Logic of Shorting in Coin-Margined Contracts: How to Profit from Funding Rates

This is one of the most interesting applications of coin-margined contracts. Suppose you buy $100,000 worth of Bitcoin spot and simultaneously open a 1x coin-margined short contract. At first glance, they offset each other, but in reality:

Regardless of Bitcoin’s price movements, your total market value remains at $100,000. When Bitcoin rises, spot profits while the contract incurs a loss; when Bitcoin falls, spot loses and the contract profits. It sounds like a zero-sum trade, but there’s a hidden profit source—funding rates.

In the Bitcoin futures market, funding rates are mostly positive. Short contracts regularly pay funding fees, effectively paying you for taking the short risk. This means that even if the price remains unchanged, you can earn steady income through this mechanism, with an annualized return of about 7%. This strategy is called riskless arbitrage because you lock in the value of the underlying asset while earning funding rates.

Advantages of Margin Replenishment Strategies: Why Coin-Margined Contracts Are Safer

Coin-margined contracts have margins denominated in coins but settled based on the USD value at the time of opening. This seemingly complex mechanism actually offers unexpected advantages.

Consider a 1x coin-margined long position: opening with $10,000 to buy 10,000 units of a coin. According to the mechanism, a 50% drop in the coin’s price triggers liquidation. But before liquidation occurs, you can add margin. The key advantage here is that since the coin’s price has fallen, you can now buy twice as many coins with the same $10,000. After replenishing, your position is supported by 30,000 coins.

When the price recovers to 67% of the opening price, the initial 10,000 coins that were at a loss now only represent a $5,000 loss, while the newly added 20,000 coins generate corresponding gains. This way, you buy more assets at a lower price with the same capital, positioning yourself to benefit from a price rebound and larger upside.

Margin Replenishment in 3x Coin-Margined Contracts

A 3x short contract offers another interesting margin replenishment scenario. Suppose you open with $20,000 to buy 20,000 coins, and use 10,000 coins to open a 3x short. When the coin’s price rises 50% near liquidation, you need to add margin. At this point, you use your reserved 10,000 coins for replenishment.

Because the coin’s price has increased, those 10,000 coins now worth $15,000 (up from $10,000), but you only need coins worth $10,000 to meet margin requirements. Compared to USD-based contracts, which would require $15,000 in cash, this is more efficient and safer. This design makes the liquidation price of coin-margined contracts much higher than that of USD-margined ones.

Why Coin-Margined Contracts Are Suitable for Low-Leverage Trading

All the advantages of coin-margined contracts are based on low leverage. If you open positions with high leverage, these benefits are offset by increased risk. Industry advice suggests that the optimal leverage for coin-margined contracts is between 1x and 3x.

Within this range, you can fully leverage the margin and replenishment advantages of coin-margined contracts without falling into liquidation traps caused by high leverage. A trader using only 1x short Bitcoin can outperform 80% of stock investors just through funding rate income, demonstrating the robustness of low-leverage coin-margined trading.