Recently, many people have been asking me about contract trading, and I’ve noticed that many beginners still have a somewhat fuzzy understanding of this area. Actually, contract trading, in simple terms, is using leverage to amplify your trading positions, allowing you to participate in larger market fluctuations with less money.

Let’s start with the basic logic. You have 100 USDT, and you believe Bitcoin will rise from 100 to 200. At this point, you can borrow 900 USDT from the exchange, using 1000 dollars to buy 10 BTC. When the price rises to 200, you sell these 10 BTC, and your account now has 2000 USDT. After repaying the 900 borrowed, you’ve made a profit of 1000 dollars. This is the power of 10x leverage — earning 1000 dollars profit with only 100 dollars of your own capital.

But what if the opposite happens? If BTC’s price doesn’t rise to 200 but falls to 95, your 10 BTC are now only worth 950 USDT. At this point, if you set a stop-loss and repay the 900 borrowed, your principal is only 50 dollars. If you stubbornly hold without stopping loss and the price continues to fall to 90, your BTC will only be worth 900 USDT. When the exchange sees that you can’t even repay the loan, they will forcibly liquidate your position, selling your coins to cover the debt. In the end, your account is wiped out, which is what people call a “liquidation.”

So, the double-edged nature of contracts is here — when the market moves as expected, leverage can amplify your gains by 10 times; when it moves against you, losses are also magnified 10 times. That’s why many advise beginners not to rush into high-leverage trading.

Another advantage of contract trading is that you can short sell. Unlike spot trading, where you can only buy long, in contracts you can sell when the market is bearish, and buy back at a lower price to profit. Some professional institutions also use low-leverage short positions to hedge risks, holding spot assets while opening short positions, so they can profit whether prices go up or down.

Regarding the classification of contracts, there are mainly two dimensions. One is based on delivery time: there are delivery contracts (futures) and perpetual contracts. Delivery contracts have a clear expiration date, such as weekly, monthly, or quarterly contracts, which must be settled or closed upon expiry. Perpetual contracts have no expiration date; you can hold them as long as you want, which is why most exchanges now promote perpetual contract products.

The other classification dimension is coin-margined contracts versus USDT-margined contracts. The difference between these two is quite interesting. USDT-margined contracts use USDT as the quote currency, so you participate directly with stablecoins without holding actual cryptocurrencies. This makes it more intuitive and easier for beginners to understand the risks and rewards. Currently, most people use USDT-margined contracts, like the BTCUSDT perpetual contract on a major exchange, which has trading volume far exceeding BTCUSDC contracts.

Coin-margined contracts, on the other hand, use the cryptocurrency itself as the quote currency, such as BTC or other coins. The advantage is that you can participate in the market directly with virtual currencies without converting to stablecoins, so you won’t miss out on potential gains from rising coin prices. Coin-margined contracts are also called inverse contracts on some exchanges.

If you ask me which is better, USDT-margined or coin-margined, it depends on your trading style. USDT-margined contracts are more beginner-friendly because they are priced in stablecoins, which reduces psychological pressure and makes risk assessment easier. Coin-margined contracts are suitable for traders who believe in the long-term appreciation of a particular coin, because even if you hold a short position and incur losses, the coin you hold might appreciate in value, partially offsetting the loss.

To avoid liquidation, I have two suggestions. First, control your leverage ratio. 10x leverage will be liquidated if the price moves against you by 10%, while 100x leverage only needs a 1% adverse move. So, beginners should not be greedy and start with low leverage to practice. Second, always set a stop-loss. This is the most effective risk management tool, which automatically closes your position when losses reach a certain level, preventing further losses or liquidation.

In summary, contract trading is a double-edged sword. When used well, it can rapidly grow your capital; if misused, it can lead to quick losses. The most important thing is to have a clear awareness of risks and not be tempted by leverage’s potential gains to forget about the dangers.