The 4 Basic Concepts of Contracts Every Beginner Must Know

(Margin, Leverage, Liquidation, Funding Rate)

Many people enter contracts → and get liquidated immediately

The reason isn’t that they can’t read the market, but that they don’t understand the basic concepts. Today, in 3 minutes, I’ll help you understand the fundamental concepts of contracts!

Margin

Definition:
Margin is the principal amount you deposit when opening a contract.

Leverage

Definition:
Leverage is a multiplier that amplifies your position, allowing you to make a small investment for a larger gain.

For example:

· 100U \times 10x leverage → equivalent to trading a 1000U position.
· Price increases by 5% → you earn 50U.
· Price decreases by 5% → you lose 50U.

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Here’s an example to help you understand the important relationship between margin and leverage:

· 10x leverage
· Position size: 100U \times 10 = 1000U
· Price rises 1% → profit = 1000U \times 1% = +10U (principal +10%, becomes 110U).
· Price drops 1% → loss = 1000U \times 1% = -10U (principal -10%, becomes 90U).
· So, if you open a position with 100U at 10x leverage, a 10% price drop will liquidate your position.
· 50x leverage
· Position size: 100U \times 50 = 5000U
· Price rises 1% → profit = 5000U \times 1% = +50U (principal +50%, becomes 150U).
· Price drops 1% → loss = 5000U \times 1% = -50U (principal -50%, becomes 50U).
· This means after opening a position, a 2% market price drop will liquidate your position.

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Liquidation Price (Liquidation Price)

What does it mean?
When the market moves to a certain price, your margin is no longer sufficient, and the exchange will directly “close” your position, resulting in liquidation.

Example:

· You open a 100U position with 10x leverage, trading a 1000U position.
· If the price drops 10%, losing close to 100U, the system will forcibly liquidate your position.
· This is why higher leverage means the liquidation price is closer, increasing risk; for example, in the 50x leverage case mentioned earlier.

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Funding Rate (Funding Rate)

How to understand?

· If the funding rate is positive (Positive):
· It indicates more market participants are long, too many longs, and the price tends to be above the spot price.
· To balance this, longs pay shorts.
· If the funding rate is negative (Negative):
· It indicates more market participants are short, too many shorts, and the price tends to be below the spot price.
· To balance this, shorts pay longs.
$ETH
Summary:

· Margin = your deposited principal.
· Leverage = amplifies your position size.
· Liquidation Price = the liquidation threshold; once reached, your position is closed.
· Funding Rate = the cost between longs and shorts, sometimes profitable, sometimes not.

Which one do you think is the most dangerous?