Explain the Role of Collateral in Maintaining a Leveraged Cryptocurrency Derivatives Position

Collateral, also known as margin, is the capital a trader must deposit with the exchange to cover potential losses on a leveraged position. It acts as a good-faith deposit.

The amount of collateral determines the maximum size of the leveraged position. If the position incurs losses, the collateral absorbs them.

If the losses deplete the collateral below the maintenance margin, a margin call or liquidation occurs.