Why Do Exchanges Require a Higher Initial Margin for Higher Leverage Levels?
Exchanges require a higher initial margin for higher leverage levels to compensate for the exponentially increased risk of liquidation. Higher leverage means a smaller adverse price move can trigger liquidation.
The higher margin acts as a larger buffer to absorb losses, giving the exchange more time to execute the liquidation before the account balance drops below zero, thus protecting the exchange and the insurance fund.
Glossar
Higher Leverage
Exposure ⎊ Higher leverage fundamentally increases a trader's market exposure by allowing control of a larger notional position with a smaller amount of capital.
Higher Margin
Leverage ⎊ Higher margin profiles in cryptocurrency derivatives necessitate a nuanced understanding of leverage mechanics, particularly concerning initial and maintenance margin requirements across exchanges.
Higher Initial Margin
Calculation ⎊ Higher initial margin refers to the increased collateral required by a derivatives exchange to open a new leveraged position, calculated based on the perceived risk of the underlying crypto asset and the trade structure.
Higher Leverage Levels
Amplification ⎊ Higher leverage levels within cryptocurrency, options, and derivatives represent a multiplicative increase in exposure relative to underlying capital, fundamentally altering risk-reward profiles.