Recently, some friends have asked me again about the difference between coin-margined contracts and U-margined contracts, so I’ll just write it down and share it.

Simply put, coin-margined means using the coin as collateral, and calculating both profit and loss in the coin. U-margined, on the other hand, does the opposite—everything is settled in U. This difference may sound simple, but in practice, the way you play it is very different.

Let me start with an interesting phenomenon. If you buy spot coins with U, and then open a coin-margined contract to short, you’ll find something “magical”: no matter whether the coin price goes up or down, your total market value stays unchanged. For example, you spend 100,000 U to buy Bitcoin spot, then open a 1x short contract. If the coin price rises by 50%, your contract loses money—but since the spot position gains, the two sides offset each other, and the total value is still 100,000 U. The key is that Bitcoin funding rates are positive most of the time, so shorting can earn that funding rate—around roughly 7% per year. That’s why people say that shorting Bitcoin at 1x is risk-free arbitrage. As long as you keep doing the arbitrage, the returns can overwhelm most stock investors.

Now let’s look at the margin mechanism. In coin-margined contracts, margin is calculated in coins, but the liquidation price is set based on the U value at the time you open the position. Fluctuations in the coin price don’t change the margin amount. Here’s the clever part: coin-margined contracts inherently have a 1x long attribute, so a 1x long position will be liquidated when the coin price drops by 50%. Say you spend 10,000 U to buy 10,000 coins when you open the position. When the coin price quickly drops by nearly 50%, you need to add margin. At this point, using the same 10,000 U, you can buy 20,000 coins to top up. The advantage is that at a lower price, you use the same U to buy more coins. Once the coin price rebounds, the additional coins you bought during the top-up can also generate profit. The original 10,000 coins drop and lose 5,000 U, but after topping up you now have 30,000 coins. As long as the coin price returns to 67% of the opening price, you can break even.

Shorting is also interesting. A 3x short contract will be liquidated when the coin price rises by 50%. For instance, if at the time you open the position you spend 20,000 U to buy 20,000 coins, with 10,000 coins opened as a 3x short. When the coin price rises by 50%, approaching liquidation, you need to add margin. You then take the reserved 10,000 coins to top up. Since the coin price has risen, those 10,000 coins are now worth 15,000 U, but you only need to top up the value of 10,000 U worth of coins to push the liquidation price up by one more round (a full doubling). Compared with U-margined contracts, the liquidation price is much higher in coin-margined contracts, so the safety is stronger.

That said, you should note that the advantage of coin-margined only really shows up at low leverage. The range from 1x to 3x is the most appropriate. With higher leverage, the risks eat up the advantage of coin-margined, and coin-margined ends up being less reliable than U-margined.