Recently, while studying contract strategies, I discovered something quite interesting—many people’s understanding of coin-margined contracts still stays at a superficial level.

Simply put, coin-margined contracts use the coin as margin, and profits and losses are calculated in the coin. This is completely different from USDT-margined contracts, which are calculated directly in USDT. But the key point is that coin-margined contracts inherently have a 1x long attribute because you need to buy coins with USDT before opening a position. The price fluctuations of the coin directly affect the spot value.

I found that the most interesting arbitrage opportunity is in 1x short positions. Suppose you buy $100,000 worth of BTC spot, then open a 1x coin-margined short contract. No matter how the coin price moves, your total market value remains $100,000. Sounds like there’s no profit, right? But here’s the threshold: the funding rate for Bitcoin contracts is mostly positive, so short contracts can continuously earn funding fees, with an annualized rate of about 7%. This is what’s called risk-free arbitrage—just relying on this can outperform most retail investors.

Now, let’s look at the margin mechanism of coin-margined contracts, which is where the cleverness lies. The margin is denominated in coins but calculated based on the U value at the time of opening the position. The price fluctuations of the coin do not affect the liquidation price. Considering that coin-margined contracts inherently have a long attribute, a 1x long contract will be liquidated if the coin price drops by 50%. For example, if you open a position with $10,000 to buy 10,000 coins, and the coin price drops nearly 50%, you need to add margin. At this point, you can use that $10,000 to buy 20,000 coins to top up the margin. The key is that you bought more coins at a lower price with the same USDT. When the price recovers, these additional coins will generate profits, and as long as the price returns to 67% of the opening price, you break even.

Short positions are similar. A 3x short contract will be liquidated if the coin price rises by 50%. If you open a position with $20,000 to buy 20,000 coins, and use 10,000 coins to open a 3x short, then when the coin price rises 50% and you need to add margin, you can use the remaining 10,000 coins. At that point, those 10,000 coins are worth $15,000, but you only need to add coins worth $10,000 to push the liquidation price up by a factor of two. This makes it much safer than USDT-margined contracts.

However, all these advantages are based on low leverage. Coin-margined contracts are really only suitable for 1x to 3x leverage. Higher leverage would amplify risks and negate the advantages of coin-margined contracts.