Written by Yenwen Feng, co-founder of Perpetual Protocol.
Yenwen Feng is a cryptocurrency and technology professional with vast experience as a CEO and co-founder of several startups. Since 2004, Yenwen founded Decore (Stripe Atlas fMessengeror Crypto Companies), Cinch Network (Decentralized Derivatives), Cubie Messenger (Mobile , 500 Startups B5, 10M downloads), Gamelet, and Willmobile (Top mobile financial service app in Taiwan, acquired by Systex). Since 2019, Yenwen is co-founder of Perpetual Protocol.
Cross Margin, also known as "Spread Margin" is a margin method that utilizes the full amount of funds in the available balance to avoid liquidations. Any realized profit & loss statement (P&L) from other positions can aid in adding margin on a losing position.
Cross margin means that the user’s funds are kept in one pool and all of their positions then use this pool as collateral. This makes managing collateral easier since the user doesn’t need to add or remove margin for each position. But importantly, this has to be used with caution as in this particular model, the P&L for one position affects all other positions.
In the event where the user has several highly leveraged positions, one position that goes against the user can cause others to be at risk and face possible liquidations. If you have just one position, then you’ll lose all your margin when liquidated. If you have more than one position, you'll lose a proportion of your margin based on the largest position.
For example, with an account balance of $10,000, cross-margining allows traders to open several positions using these funds as collateral. However, if you have an open position and then enter another position in a different market, the liquidation price of your positions will be affected since the margin used for these positions comes from the same balance (in contrast to isolated margin). Depending on your risk tolerance and trading style, cross-margin may be more suitable, e.g., if you want to hedge against your positions or engage in pair trading.
