Recently, new traders have been asking me about the difference between coin-margined contracts and USDT-margined contracts, so I thought I’d organize my thoughts because this stuff can definitely be confusing.

Simply put, coin-margined contracts use the coin as collateral, and profits and losses are calculated in the coin; USDT-margined contracts are calculated entirely in USDT. It sounds like there’s no difference, but the actual operation varies a lot. The core of coin-margined contracts is that they inherently have a 1x long property because you need to buy coins with USDT before opening a position, and the coin’s price fluctuations directly affect your spot holdings.

What I find most interesting is the logic behind shorting with coin-margined contracts. A 1x short sounds contradictory, but in principle, it’s zero leverage, so it can’t be liquidated. When the coin price drops, you get more coins; when it rises, you lose coins, but the total market value remains unchanged. For example, if you buy $100,000 worth of BTC spot and then open a 1x coin-margined short, regardless of how the price fluctuates, your total assets stay at $100,000. The key is that Bitcoin’s funding rate is mostly positive, so shorting can earn this rate, roughly 7% annual return. That’s why some say that a 1x Bitcoin short is risk-free arbitrage—seriously doing this can outperform most stock investors.

The margin mechanism of coin-margined contracts is quite special. The margin is calculated in coins, but the liquidation price is based on the USDT value at the time of opening. Because coin-margined contracts inherently have a 1x long property, a 1x long position will be liquidated if the coin price drops 50%. Suppose you open a position by spending $10,000 to buy 10,000 coins; if the coin price drops close to 50%, you need to add margin. At this point, you can buy 20,000 coins with the same $10,000 to top up, which creates an advantage—you bought more coins at a lower price. When the price rebounds, these additional coins also generate gains. Originally, 10,000 coins losing 50% results in a $5,000 loss; after topping up, you hold 30,000 coins, and just a 67% return to the opening price can break even.

The shorting scenario is the opposite. A 3x short will be liquidated if the coin price rises 50%. When opening the position, you might spend $20,000 to buy 20,000 coins, and use 10,000 coins to open a 3x short. When the coin price rises 50% and liquidation is near, you can use the remaining 10,000 coins as margin. Now, those 10,000 coins are worth $15,000, but you only need to add margin in coins worth $10,000 to push the liquidation price higher by a factor of two. Compared to USDT-margined contracts, your liquidation price is higher, providing a larger safety margin.

All this said, the main advantage of coin-margined contracts ultimately still relies on low leverage. My recommendation is to open positions with 1x to 3x leverage; higher leverage risks are not worth it.