Isolated Margin Trading (Derivatives Trading)

Isolated Margin Trading in crypto refers to a trading method where a trader can borrow funds to amplify their position in a particular cryptocurrency, while limiting the potential losses to the initial investment or collateral provided. In this type of trading, the borrowed funds are isolated or ring-fenced, meaning they are only used for the specific position and not for other trades.

Example: Let's say a trader wants to buy $10,000 worth of Bitcoin but only has $5,000 in their account. Through isolated margin trading, they can borrow an additional $5,000 to complete the purchase. If the trade goes in their favor, they can profit from the increased exposure. However, if the trade moves against them, their losses are limited to the initial $5,000 they invested, and the borrowed $5,000 is untouched.

Case: Consider a scenario where a trader engages in isolated margin trading with a leverage of 2x. They have $10,000 in their account and borrow an additional $10,000 to buy $20,000 worth of Ethereum. If the price of Ethereum increases by 10%, the trader's position would be worth $22,000. After repaying the borrowed $10,000 plus any interest, the trader would be left with a profit of $2,000, effectively doubling their initial investment. However, if the price of Ethereum drops by 10%, the trader's position would be worth $18,000. Since their losses are limited to their initial $10,000 investment, they would have incurred a loss of $2,000 after repaying the borrowed funds and any associated costs.