We inspect various ways an investor can use the margin feature on dYdX. These words must not be taken as trading advice. Anyone interested in open finance should do thorough research and analyze the different aspects before using such products. These products should be seen as experimental.
This article provides a deeper analysis of the dYdX but if you are a newbie then reach out to our help page or the first part of our series Getting Started.
The world is changing at a very fast pace and many people don’t understand new concepts and tools. This fast change leads to many new problems. To resolve such problems and to provide the conventional tools that people have been using, dYdX was created. By keeping in mind the problems of investors, we launched our new trading application. The rationale behind the design of our product was that it will enable the traders to trade straight from their account and named this feature cross margin.
The two terms, cross margin and isolated margin are completely different. Cross margin is the method that utilizes the full amount of funds available in the trader’s account whereas isolated margin is the margin balance allocated to an individual position.
It is necessary to have complete knowledge of both terms, margin and leverage, before moving on. In this article, we will further elaborate on how a trader can utilize both features diligently on dYdX. Cross margin will our main focus but we will explain both to know the difference.
Margin and Leverage:
Any trader participating in the market knows the importance of margin and leverage. There is no difference between the traditional and Open Finance markets when it comes to utilizing the margin and leverage. The core concept of these two features is the same in both markets.
Margin is the practice of using assets owned by an individual as collateral for a loan from a broker. In simple words, it is the number of assets deposited by the trader. The broker takes his interest from the broker for borrowing funds.
It is the practice of using borrowed capital to carry out an endeavor to amplify its potential returns. The increased buying power helps the trader to get higher profits but the risk ratio also increases.
How to think about leverage:
A useful way of thinking about leverage is to view the overall existing assets of an individual compared to the amount of money they have borrowed. It is a risky game so higher leverage should not be presented in glowing light. One extremely important thing is that how much capital a trader is risking in comparison to their entire portfolio. Lower leverage can also be a risker in some cases.
For example- Suppose two different scenarios for a trader with a $10,000 portfolio:
- The 10x long leverage position with a $1000 margin deposit = a total trade size of $10,000. Here 10% of the portfolio is at risk.
In simple words, a trader who has deposited a lower margin and takes higher leverage will be close to liquidation. In the other case if a trader deposits a higher margin and takes low leverage will be distant from the liquidation. Many factors decide how leverage must be utilized for high returns.
Trading on DyDx:
dYdX is determined to provide the traders with the best tools for using the leverage. Traders can utilize two types of leverage, isolated and cross margin, on dYdX which will help them to use it diligently. As we have discussed before isolated is pretty simple and typically better understood.
What is Isolated margin:
Many of you must have understood by the term “isolated” that it is the specific amount of funds a trader uses for a trade. Leverage is the key factor here to determine that how much funds must be deposited. In case of the liquidation, an isolated margin is used to cover the losses.
What is Cross Margin:
Cross Margin is discussed before uses all the assets in the trader’s account as collateral. This may seem risker to many people but hold your horses we will completely guide you on how to benefit from this.
“With cross margin, the fundamental thing to understand is that you are trading from your Account Balance — this is the same balance that goes up and down based on any lends or borrows that you perform. Account balances can be positive or negative.”
The rules for collateralization are the same for lending and borrowing on dYdX via the Account Balance page. In the case of positive balances, the trader earns interest and negative balances owe interest. Many actions can be taken via cross margin trading on dYdX.
Quickly spot trade:
Quickly spot trade is that you convert one of your assets to other.
Trading who have lent ETH but would get a higher return on DAI or in other cases he wants to lock ETH profits from your earlier trades. The trader has the option to cross trade complete or portion of ETH into DAI. DAI starts earning interest immediately for the trader.
Margin Long ETH:
Suppose that a trader has 2 ETH, 1000 USDC, and 0 Dai in his account. The price of the 1 ETH= 500 DAI. The trader can take leverage by cross trading and strengthen his ETH position. If the trader cross trades, then it means that he is borrowing DAI and selling for ETH. If the trader goes long then his balance at the end will be 4 ETH, 1000 USDC, and -1000 DAI. ETH and USDC in the trader’s account are used as collateral in this case. This feature can be utilized through the ETH-USDC market in dYdX.
This is better option to go and the reason is that your positive ETH position will be gaining interest at all times. On dYdX, traders can go as low 1.25x of the leverage and they must keep it above 1.15x. These capital requirements of dYdX are much lower than MakerDAO.
Margin Short ETH:
For example: let’s suppose a trader has 0 ETH and 500 DAI in his account. Let’s say the price of 1 ETH= 500 DAI. The trader can execute a sell, cross trade, and go short on ETH. Selling 1 ETH will give the trader 50 DAI and his account will have 1 ETH and 550 DAI. Still, the trader will be short on ETH. This is also achievable through the ETH-USDC market.
Carry Trade DAI-USDC:
Already discussed in this previous article.
- The assets lent on platform can act as a collateral. dYdX platform supports the coins like ETH, USDC, DAI, and plans to add many more. There is no need for specific assets for cross trading. You can start trading without wasting any time as you can lend the cryptocurrency from the platform. Any asset present in your account will act as collateral.
- On dydX, any asset locked up is earning interest for you, and all positive balances are also included. Collateral of 1.15x must be maintained on dYdX.
- A trader understands the importance of distant liquidation. In this way, even if a trade goes south for a short term due to any news then you don’t have to be worried about your liquidation. By increasing the collateral assets in an open position, traders can avoid the risk of being liquidated.
There are always risks associated if you trade. In the case of extreme price movement, the trader can see his account falling way down to 1.15x collateral. However, there are more chances of liquidation when a trade is closer to your account balance size.