Recently, while chatting with friends, I found that many people still have misconceptions about coin-margined contracts, so I’ll briefly share my understanding.

First, let’s talk about the most straightforward difference: U-based contracts use U as margin, and both gains and losses are calculated in U. Coin-margined contracts, on the other hand, use the coin directly as margin—so the entire profit and loss calculation is in the coin. It sounds similar, but the trading logic is very different.

Coin-margined contracts have a natural characteristic: because you first use U to buy the coin, and the coin price’s rise and fall directly affects your spot position, coin-margined contracts inherently have a 1x long attribute. This point is very important. That means even if you only open a 1x contract, it already contains the features of being long.

The most interesting trading setup I’ve found is a 1x coin-margined short. On the surface, it looks kind of boring, but in reality, this is zero leverage—so you will never get liquidated. For example, I buy $100,000 worth of Bitcoin spot, then open a 1x coin-margined short contract. No matter how Bitcoin moves up or down, my total market value always stays at $100,000. It doesn’t sound like there’s much of an advantage, but there’s a hidden source of income here—funding rates. Bitcoin’s funding rate is positive for most of the time, and a short position can earn this funding rate—about 7% per year. That’s why some people call it “risk-free arbitrage,” and just by relying on this you can outperform most retail investors.

Now let’s talk about the case of going long with coin-margined contracts. The margin is locked in coins, but the liquidation price is calculated based on the U value at the time you open the position. Because coin-margined contracts have a long attribute built in, a 1x long position will be liquidated when the coin price drops by 50%. Suppose I use $10,000 to buy 10,000 coins of a certain coin, then open a 1x long. When the coin price is about to drop close to 50%, I need to add margin. Here’s the clever part: with that same $10,000, I can now buy 20,000 coins. After adding the margin, I can avoid liquidation forever. Even better, although those 10,000 coins lose $5,000 when they drop by 50%, after I add the margin I end up holding 30,000 coins. As long as the price rebounds to 67% of the opening price, I can break even. This is the advantage of adding margin at the bottom.

Coin-margined 3x shorts follow a similar logic. Say I use $20,000 to buy 20,000 coins, then use 10,000 of those coins to open a 3x short. When the coin price rises 50% and is close to liquidation, I use the remaining 10,000 coins to add margin. Since the coin price has risen, those 10,000 coins are now worth $15,000, but I only need to add the coin amount worth $10,000 to push the liquidation price up by one more factor. Compared with U-based contracts, the liquidation price of coin-margined contracts will be higher, giving a better safety factor.

After saying all this, the core is that the advantage of coin-margined contracts is actually built on low leverage. I typically open 1 to 3x positions myself, so I can truly take advantage of the features of coin-margined contracts. High leverage, on the other hand, amplifies risk and removes the inherent advantage of coin-margined contracts.