Cross Margin and Isolated Margin

5.1 The whole account, gone

Node had heard a painful story from a colleague. The colleague opened one small leveraged position, a minor bet on a small token, alongside a few larger, safer positions. The small token crashed overnight. By morning, the colleague's entire account was gone, including the money backing the safer positions.

"How did one small trade wipe out everything?" Node asked.

"Margin mode," said Hash. "Your colleague was almost certainly using cross margin, and didn't realise what that meant."

5.2 Two ways to back a position

When you open a leveraged position, the exchange needs to know which funds absorb its losses. There are two main choices.

Isolated margin. Only the margin you assign to a specific position backs it. If that position is liquidated, you lose that margin, and nothing else.

Cross margin. Your entire available account balance backs all positions together. Profits from one position can support another, and losses in one position can draw on the whole account.

Think of two ways to pack money for a trip. With isolated margin, you split cash into separate envelopes for each day: if you lose one envelope, the others are safe. With cross margin, you keep everything in one wallet: more flexible, but if you lose the wallet, you lose it all.

5.3 A worked comparison

Mint has $10,000 in a perp account and opens a long position of 0.1 BTC at $100,000 ($10,000 notional) at 10x leverage, posting $1,000 of initial margin.

	Isolated margin	Cross margin
Margin backing the position	$1,000	The full $10,000 account
Approximate liquidation price	~$90,500	Close to $0, because $10,000 of equity backs a $10,000 position: effective leverage is only 1x (Chapter 4)
Maximum loss on this position	~$1,000	Up to the entire account
Funds left if liquidated	~$9,000	Close to zero

With cross margin, the position is much harder to liquidate, because the whole account cushions it. But if BTC really did fall far enough, Mint would lose everything.

"Cross margin makes the position safer from liquidation and my account less safe overall," said Mint.

"That's exactly the trade-off," said Hash.

Chapter 5 · Cross versus isolated margin

A $10,000 account opens 0.1 BTC at ten times leverage with $1,000 margin. Under isolated margin the position liquidates nearer entry and caps the loss at about $1,000. Under cross margin the whole balance backs the position, so it liquidates far lower but can lose the entire account.

5.4 Strengths and weaknesses

	Isolated margin	Cross margin
Maximum loss per position	Limited to its assigned margin	Can reach the whole account
Liquidation distance	Closer, set by assigned margin	Further, supported by the whole account
Flexibility	Must manually add margin to save a position	Profits and balances automatically support positions
Good for	Speculative trades, defined risk per trade	Hedged positions, experienced traders managing a portfolio
Main danger	Being liquidated on a normal move if margin is thin	One bad position consuming the entire account

5.5 Cross margin and hedging

Cross margin is particularly useful when positions offset each other. Suppose Mint is long BTC perps and short ETH perps as a relative-value trade. If both fall together, the long loses but the short gains. Under cross margin, the short's gains support the long's margin automatically. Under isolated margin, the long could be liquidated even while the overall position is fine.

The same applies to the hedging strategies in Chapter 12.

5.6 Portfolio margin

Some exchanges offer portfolio margin or unified margin for more advanced users. These systems calculate margin requirements based on the overall risk of all positions, including offsets between them, and sometimes let you use multiple assets as collateral, such as BTC, ETH, and stablecoins together.

Portfolio margin can be very capital-efficient, but it adds complexity: if the value of your collateral assets falls at the same time as your positions lose, your margin can shrink from two directions at once, much like inverse contracts in Chapter 3.

5.7 The colleague's mistake

Hash reconstructed what likely happened to Node's colleague.

Position	Margin mode	What happened overnight
Large BTC long	Cross	Small loss
Large ETH long	Cross	Small loss
Small token long, high leverage	Cross	Token fell 60%

Because everything was on cross margin, the small token's huge loss drew on the whole account. As the account balance shrank, the BTC and ETH positions' liquidation prices moved closer too. Eventually the losses triggered liquidations across all positions.

"If the small token had been on isolated margin, your colleague would have lost a few hundred dollars," said Hash. "Instead, the account was wiped out."

5.8 Practical guidance

1. Know which mode you're in. Many exchanges default to cross margin. Check before opening any position.
2. Use isolated margin for speculative trades, so each trade's maximum loss is defined.
3. Use cross margin deliberately, mainly for hedged or offsetting positions, and only with the understanding that the whole account is at risk.
4. Don't keep more in a derivatives account than you need. Keep the rest in spot or self-custody (Module 2), so it can't be drawn into a liquidation.
5. Remember that isolated margin limits the loss to the margin, not the risk to your plan. Position size and stop-losses still matter (Chapter 14).

Node nodded. "So isolated margin is like a firewall between trades."

"And keeping most of your money outside the derivatives account is a firewall around the whole building," said Hash.

5.9 Try it yourself

On a demo or testnet exchange, find where margin mode is selected and what the default is. Open the same position in isolated mode and in cross mode with the same leverage setting. Compare the liquidation prices. Then add a second position in cross mode and watch how the first position's liquidation price changes.

Key takeaways from this chapter

1. Isolated margin limits a position's losses to its assigned margin; cross margin uses the whole account.
2. Cross margin moves liquidation further away but puts the entire account at risk.
3. Isolated margin suits speculative trades; cross margin suits hedged or offsetting positions.
4. Portfolio margin can be efficient but adds complexity, especially when collateral values fall.
5. Under cross margin, one bad position can drag every other position toward liquidation.
6. Check your margin mode, keep only necessary funds in derivatives accounts, and still size positions carefully.