Understand what Margin Level is and How to Manage Risks When Using Leverage in Crypto Trading

Margin trading with leverage is an optimal strategy to maximize profits but also carries significant liquidation risks. The key to success lies in understanding how to calculate margin level, managing appropriate collateral ratios, and applying protective tools like Stop-Loss. When the crypto market booms with strong capital flows, margin borrowing interest rates on trading platforms continue to rise. This signals a surge in borrowing demand, especially when Bitcoin surpasses important price thresholds. However, not everyone understands how the margin level mechanism operates to avoid liquidation risks.

New capital inflows into the crypto market and their impact on borrowing interest rates

According to data from leading exchanges, the margin loan rate for the BTC/USDT pair has increased from 0.01% to 0.05% per day, reflecting extremely high short-term borrowing demand in the current phase. This increase clearly indicates that investors are seeking to leverage market opportunities by borrowing to expand their trading positions.

Strong capital flows not only increase liquidity but also boost trading speed, creating favorable conditions for altcoin projects to attract attention. Currently, Bitcoin is trading at $91.35K (up 1.39% in 24 hours), with margin borrowing pressure continuing to rise, showing short-term investor confidence.

What is margin level? Calculation formula and practical significance

Margin level is an indicator of the health of a margin trading account, calculated by the formula:

Margin Level = (Net Assets / Loan Amount) × 100%

This index reflects the ratio between the actual asset value and the borrowed amount. When the margin level is too low, the exchange will automatically liquidate positions to protect lenders’ interests.

In other words, margin level indicates how “safe” you are. Accounts typically need to maintain a margin level above 1.1 (110%) to avoid liquidation. When the index falls below this threshold, liquidation risk becomes imminent.

Two main types of margin and how to calculate borrowing interest

Exchanges categorize margin into two types:

Cross Margin: All assets in the account serve as collateral collectively. This method offers more flexibility but carries higher overall risk because a large loss on one position can affect the entire account.

Isolated Margin: Each trading pair has its own collateral. This limits risk to individual positions but requires separate management for each trade.

Interest rates are calculated hourly, for example, 0.01%/hour for a loan of 10,000 USDT means you pay 1 USDT per hour. These rates fluctuate continuously based on supply and demand conditions.

Liquidation price and potential risks

The liquidation price is the asset price at which your position can no longer sustain the borrowed amount, prompting the system to automatically liquidate all or part of your position.

Liquidation price depends on three factors:

• Current collateral value
• Borrowed amount
• Maintenance Margin Ratio (MMR) set by the exchange

During volatile market phases, liquidation risks spike. Historical data shows over 1.7 billion USD in margin positions were liquidated in a single day when Bitcoin fluctuated between 90,000 – 100,000 USD, due to sudden news or market sentiment swings.

Leverage amplifies profits but requires caution

Leverage is a tool to multiply gains when the market rises. For example, using 5x leverage when Bitcoin increases from $91,350 to $109,620 (a 20% increase) results in a 5-fold profit, i.e., 100%. This explains why many investors use margin during FOMO (Fear of Missing Out) periods.

However, high leverage also entails high risk. If the market drops 20% with 5x leverage, you lose 100% of your capital and may face liquidation. Altcoins tend to be more volatile; they can lose 20-30% in days of market swings, increasing the risk of liquidation if high leverage is used.

Practical example: Borrow 5x margin to accumulate ETH

Suppose you have $10,000 and want to use 5x leverage to buy Ethereum at $3,500. Your total trading capital will be $50,000, allowing you to buy approximately 14.29 ETH.

If ETH’s price rises to $8,000, the total asset value reaches $114,285.6. With a borrowing interest rate of 0.01%/hour over 3 months (about 2,160 hours), the total interest is $8,640.

Net profit = 114,285.6 - 10,000 (original capital) - 50,000 (loan) - 8,640 (interest) = 45,645.6 USD

This is a significant profit compared to the initial investment. However, danger lurks if ETH’s price drops. If the price falls below $2,800, the margin level will drop below the safe threshold, leading to immediate liquidation.

Essential risk management skills

To use margin safely, you need:

1. Regularly monitor margin level: Set alerts when the index approaches liquidation thresholds, such as 1.3 instead of waiting until 1.1.

2. Apply reasonable Stop-Loss: An automatic Stop-Loss closes positions when losses reach a certain point, protecting your account from sudden volatility.

3. Avoid excessive leverage: For beginners, 2x-3x leverage is appropriate. Increase to 5x or higher only when you have solid risk management experience.

4. Diversify positions: Instead of putting all capital into one trade, split into multiple entries to reduce impact if the market moves against you.

5. Keep abreast of news and market sentiment: Major changes can trigger strong volatility, causing margin levels to fall rapidly.

Current Ethereum and trading opportunities

Ethereum is trading at $3.14K (up 1.06% in 24 hours). With positive market momentum, some investors see this as an accumulation opportunity with margin. However, this strategy is suitable only for those with clear risk management plans.

Frequently asked questions about margin level and leverage

What is the minimum safe margin level?

Usually 1.1 (110%) to avoid immediate liquidation, but it’s safer to keep it higher, such as 1.5 or 2.0, to have buffer during market volatility.

Why is Stop-Loss important?

Stop-Loss limits losses at a predetermined level, preventing continuous losses that could lead to total liquidation.

What leverage is safe for beginners?

Leverage of 2x-3x is safe for newcomers, providing reasonable profit potential with manageable risk. Increase gradually as you gain experience and confidence in risk management.

How to know when to close a position?

Monitor margin level and technical indicators. If margin level drops below 1.5 or technical signals indicate reversal, consider closing part or all of your position.

Do margin borrowing interest rates change?

Yes, interest rates fluctuate according to market supply and demand, updated continuously every hour. When markets heat up, rates increase, affecting your profits.

Using margin can accelerate profit generation, but only if you thoroughly understand concepts like margin level, manage risks carefully, and are prepared to close positions when necessary.