Deribit Margin FAQ

Introduction

Trading crypto futures on platforms like Deribit offers significant opportunities for profit, but also comes with inherent risks. A crucial aspect of successfully navigating this landscape is understanding margin. Margin allows traders to open larger positions than their account balance would normally permit, amplifying both potential gains *and* losses. This article provides a comprehensive FAQ specifically focused on margin trading on the Deribit exchange, tailored for beginners. We will cover everything from basic definitions to advanced concepts like initial margin, maintenance margin, and liquidation, aiming to equip you with the knowledge to trade responsibly and effectively.

What is Margin in the Context of Deribit?

At its core, margin is the collateral you provide to Deribit to open and maintain a leveraged position. Instead of paying the full value of a futures contract upfront, you deposit a percentage. This percentage is known as the *initial margin*. Deribit then "loans" you the remaining amount, allowing you to control a larger position with less of your own capital.

Think of it like borrowing money to buy a house. You put down a down payment (initial margin), and the bank provides the rest of the financing. However, if the house's value decreases significantly, the bank may require you to deposit more funds to cover potential losses. Similarly, if the market moves against your position, Deribit will require you to deposit more funds (a *margin call*) or may automatically close your position to limit its losses.

Key Margin Terms You Need to Know

Before diving into specifics, let's define some essential terms:

**Initial Margin:** The percentage of the total contract value that you need to deposit to open a position. Deribit has different initial margin requirements depending on the cryptocurrency, the contract type (Perpetual vs. Expiry), and your risk tier.
**Maintenance Margin:** The minimum amount of equity you need to maintain in your account to keep a position open. This is typically a percentage of the total contract value, lower than the initial margin.
**Margin Ratio:** Your account equity divided by the initial margin requirement. A higher margin ratio indicates a healthier account with more buffer against liquidation.
**Liquidation Price:** The price at which your position will be automatically closed by Deribit to prevent further losses. This price is calculated based on your margin ratio and the contract size.
**Margin Call:** A notification from Deribit indicating that your margin ratio has fallen below a critical level and you need to deposit more funds to avoid liquidation.
**Realized P&L:** The profit or loss that has already been settled on a closed position.
**Unrealized P&L:** The potential profit or loss on an open position, calculated based on the current market price.
**Equity:** Your account balance plus unrealized Profit and Loss (P&L).
**Cross Margin vs. Isolated Margin:** Cross Margin uses the entire account balance as collateral for all open positions. Isolated Margin only uses the margin allocated to a specific position. Deribit primarily offers cross margin for perpetual contracts.

Deribit Margin Requirements: How are they Determined?

Deribit's margin requirements are dynamic and can change based on several factors:

**Underlying Asset Volatility:** More volatile cryptocurrencies generally have higher margin requirements. Volatility increases the risk of rapid price swings, and therefore requires more collateral.
**Contract Type:** Perpetual contracts typically have lower initial margin requirements than expiry contracts.
**Market Conditions:** During periods of high market stress or uncertainty, Deribit may increase margin requirements across the board.
**Risk Tier:** Deribit has a tiered risk system based on your trading activity and account size. Higher tiers may have access to lower margin requirements. You can find details on risk tiers in the Deribit Risk Management documentation.
**Funding Rate:** For perpetual contracts, the funding rate can indirectly affect margin requirements by impacting unrealized P&L.

You can always find the current margin requirements for each contract on the Deribit website under the "Contract Specs" section. It's crucial to check these requirements *before* opening a position.

Understanding Initial Margin on Deribit

Let's illustrate with an example. Suppose you want to open a long position on Bitcoin (BTC) perpetual contract worth $10,000, and the initial margin requirement is 5%.

**Initial Margin Required:** $10,000 * 5% = $500
**Leverage:** $10,000 / $500 = 20x

This means you only need $500 of your own capital to control a $10,000 position. However, remember that leverage is a double-edged sword. While it magnifies potential profits, it also magnifies potential losses.

Maintenance Margin and Liquidation: Avoiding Forced Closure

Once your position is open, you need to maintain sufficient equity to meet the maintenance margin requirement. Let's assume the maintenance margin for the same BTC perpetual contract is 2.5%.

**Maintenance Margin Required:** $10,000 * 2.5% = $250

If the price of Bitcoin moves against your position, reducing your unrealized P&L, your account equity will decrease. If your equity falls below $250, you will receive a margin call.

If you don't deposit additional funds to restore your equity above $250, Deribit will automatically liquidate your position at the liquidation price. The liquidation price is calculated to ensure that Deribit recovers its funds. It's *always* better to manually close a losing position than to be liquidated, as liquidation prices are often worse than you might expect. You can monitor your margin ratio and liquidation price in real-time on the Deribit platform. Risk Management Tools can help you set alerts.

Cross Margin vs. Isolated Margin on Deribit

Deribit predominantly uses cross margin for its perpetual contracts.

**Cross Margin:** All of your account equity is used as collateral for all open positions. This means that losses on one position can be offset by profits on another, providing more flexibility. However, it also means that a losing position can impact your entire account.
**Isolated Margin:** Only the margin specifically allocated to a particular position is at risk. This limits your potential losses on that position, but it also means that you may be liquidated more quickly if the market moves against you. Isolated margin is generally available for specific futures contracts but is less common on Deribit’s perpetuals.

Understanding the differences between these margin modes is crucial for managing your risk. Position Sizing is particularly important with cross margin.

Deribit's Auto-Deleveraging Feature

In situations of extreme market volatility, Deribit employs an auto-deleveraging mechanism. This system is designed to reduce systemic risk and ensure the stability of the platform. It works by reducing the positions of highly leveraged traders, effectively redistributing their risk across the platform. While it's a safety measure, it's another reason why maintaining a healthy margin ratio is vital.

How to Monitor Your Margin on Deribit

Deribit provides several tools to help you monitor your margin:

**Account Dashboard:** Provides a real-time overview of your equity, margin ratio, and unrealized P&L.
**Position View:** Displays the margin requirements and liquidation price for each open position.
**Margin Call Notifications:** Deribit will send you email and platform notifications when your margin ratio falls below a critical level. Ensure these notifications are enabled!
**Risk Management Alerts:** You can set custom alerts to notify you when your margin ratio reaches a specific threshold.

Regularly monitoring these metrics is essential for proactive risk management.

Strategies to Manage Margin Risk on Deribit

**Use Stop-Loss Orders:** Stop-Loss Orders automatically close your position when the price reaches a predetermined level, limiting your potential losses.
**Reduce Leverage:** Lowering your leverage reduces your margin requirements and the risk of liquidation.
**Diversify Your Portfolio:** Spreading your capital across different cryptocurrencies can reduce your overall risk.
**Avoid Overtrading:** Taking on too many positions can strain your margin and increase your risk of liquidation.
**Stay Informed:** Keep up-to-date with market news and analysis to make informed trading decisions. Technical Analysis and Fundamental Analysis are both valuable.
**Understand Funding Rates:** For perpetual contracts, be aware of the funding rate and how it can affect your P&L.
**Backtesting:** Before deploying a strategy with real capital, Backtesting can help you understand its performance under different market conditions.
**Trading Volume Analysis:** Understanding Trading Volume can give you insights into the strength of a trend and potential reversals.
**Volatility Analysis:** Assess Implied Volatility to adjust your position size and risk exposure.
**Position Sizing:** Carefully calculate your position size based on your risk tolerance and account equity.