Recently, someone asked me about the difference between coin-margined contracts and U-margined contracts, so I’ll talk about this topic.

Simply put, coin-margined means using coins as collateral, with profits and losses calculated in coins, while U-margined means using U throughout. But there’s a really interesting point here—coin-margined contracts inherently come with a 1x long characteristic. Why is that? Because you have to first use U to buy coins for spot, and the coin price movements will directly affect your spot portion. So from the very beginning, coin-margined contracts carry a long bias.

I think the most ingenious play is a 1x short coin-margined contract. In principle, this is equivalent to zero leverage and will never be liquidated. When the coin price drops, you receive more coins; when the coin price rises, although your coin amount decreases, the price per coin is higher, so your total market value stays unchanged. For example, if you buy $100,000 worth of BTC spot and then open a 1x coin-margined short contract, no matter how the price fluctuates, your total market value is always $100,000. What’s even more important is that BTC’s funding rate is positive most of the time. By holding a short contract, you can continuously collect funding fee yield—annualized at roughly 7%. This is what we often call risk-free arbitrage; just relying on this alone lets you outperform most retail investors.

The margin mechanism for coin-margined contracts is also quite special. The margin exists in coin form, but when calculating its value, it’s based on the U price at the time you open the position. This means that coin price fluctuations won’t directly affect your margin or your liquidation price.

Given the inherent long bias of coin-margined contracts, a 1x long contract will be liquidated when the coin price drops by 50%. Suppose you open with 10,000 U to buy 10,000 coins. When the price is about to drop by 50%, you need to add margin. At that point, with the same 10,000 U, you can buy 20,000 coins to add to your position, so you’ll never get liquidated. And there’s a huge advantage here: you buy more coins with the same U at a lower price; once the coin price rebounds, those added margin coins will also generate returns. Originally, the 10,000 coins would lose 5,000 U; after topping up, you hold 30,000 coins. As long as the price rebounds to 67% of the opening price, you break even.

Now take a 3x short coin-margined contract. This one gets liquidated when the coin price rises by 50%. Suppose you open with 20,000 U to buy 20,000 coins, and one of those 10,000 coins is used as the 3x short. When the price rises by 50% and is nearing liquidation, you use the other reserved 10,000 coins to add margin. The clever part is—since the price has already increased, those 10,000 coins are now worth 15,000 U, but you only need to add coins worth 10,000 U to push the liquidation price up by one more multiple, making the safety far higher than U-margined contracts.

In summary, the advantages of coin-margined contracts mainly show up at low leverage. My advice is that 1–3x is enough—don’t get greedy and open with too high leverage. Once you fully understand this logic, you’ll find that it offers many arbitrage and risk-management plays that U-margined contracts can’t think of.