How Does a Centralized Exchange (CEX) Use Margin Trading in Financial Derivatives?
CEXs allow users to trade derivatives, such as perpetual futures, using borrowed funds, which is margin trading. The CEX acts as the counterparty or facilitator, providing the leverage and managing the risk.
Users deposit a small amount (initial margin) to control a much larger position. The CEX continuously monitors the user's equity against the maintenance margin and will automatically liquidate the position if the collateral falls below this threshold to prevent the CEX from incurring losses.
Glossar
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.
Centralized Exchange
Custody ⎊ Centralized Exchanges function as custodians for digital assets, managing private key infrastructure and providing a regulated framework for asset holding, a critical component for institutional adoption within cryptocurrency markets.
Margin Trading
Leverage ⎊ Margin trading within cryptocurrency, options, and derivatives markets represents the utilization of borrowed capital to amplify potential investment returns, though simultaneously increasing exposure to risk.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Perpetual Futures
Structure ⎊ Perpetual Futures are a type of derivative contract, native to the cryptocurrency market, that allows traders to speculate on the future price of an underlying asset without a fixed expiration date.