I want to say that self-exploration and learning from professional teachers are two different matters, but ultimately it's the same. I guess many people will ask why it's the same. Based on my years of experience in the crypto world, it's about self-exploration first, then when you face liquidation or hit a wall, you turn to professional teachers. So I believe this is a process, whether it's learning from a teacher first or exploring on your own, it’s all part of the process. Entering the crypto world is to make money, so whether through self-exploration or learning from teachers, it’s about making money. This is a very cool thing; the process is not important, the result is. As a senior in the crypto world, I want to share my experiences!
1. Discuss the essence of price. Assuming there is a trading pair tokenA/tokenB, how is the price of tokenA determined? Price is the result of supply and demand. Price is the ratio of the liquidity + (quantity) of A and B. A and B are two parts of a liquidity pool, and the constant product formula for trading exchange rates is x*y=k. Therefore, when a large amount of token A is purchased, it will cause a shortage of token A and the price will rise.
The supply and demand relationship determines the price of token A. The first is the AB trading pair, and the operation providing liquidity determines the initial trading exchange rate. If this exchange rate is too high or too low compared to the market, arbitrage traders will quickly eliminate the gap until the market reaches a normal level.
2. Discuss the relationship between liquidity and price.
Liquidity itself has no relationship with price; the only factor that affects price is supply and demand. Sufficient liquidity can reflect the market after thorough trading, and price is the result of intense competition. In contrast, products with low liquidity may significantly deviate from their actual value.
3. Describe in your own words what limit orders+ and market orders+ are.
A limit order refers to an order where the user must buy or sell at a specified price.
If the price of BTC is at 6500 USD and the investor wants to buy at 6300 USD, they need to submit an order to buy at 6300 USD. Once the price reaches 6300 USD, the order has a chance to be executed. If the price goes below 6300 USD, the order will definitely be filled completely, and the average execution price will usually also be lower than 6300 USD.
A market order will execute the order at the current price of the virtual currency. If the latest price of BTC is 6500 USD, then the execution price is likely to be this price or close to it.
4. Describe in your own words what isolated margin* and cross margin+ are.
[Cross margin] means that all available balance in the account can serve as collateral to avoid being liquidated. 'Going all in' or 'all in' refers to cross margin. The benefit of this model is that as long as the leverage is moderate, the possibility of liquidation is very low, so it is often used for hedging and quantitative trading.
[Isolated margin] When the user's held position is liquidated, the loss will only be the amount of margin for that position and will not affect other funds in the contract account. In isolated margin mode, the margin is the maximum loss for the user.
For example, if you have 10 USDT in your contract account and you invest 1 USDT to open a position, you will have 9 USDT left as available funds. In a isolated margin situation, you can only use the 1 USDT you invested to open the position; the remaining 9 USDT is unaffected. This allows you to leverage your gains with limited risk. In a cross margin situation, the initial investment of 1 USDT will automatically transfer USDT from the remaining 9 USDT in the contract account into the contract position when the margin is insufficient to avoid liquidation. This allows your contract position to better withstand short-term adverse market movements.
5. Is the contract market settled separately from the spot market or combined?
Settled separately. The spot market is one market, while the contract market is another. Trading with the spot market does not affect the contract market, so they are separate.
6. What is the funding rate in the contract? Why design a funding rate? Assuming the funding rate is 0.02%, does the short position pay the long position or does the long position pay the short position? Does this indicate that the contract price is higher or lower than the spot price?
The funding rate is the price balancing mechanism of perpetual contracts, referring to the periodic fees paid to long or short traders based on the price difference between the perpetual contract market price and the spot price.
Because perpetual contracts do not have a settlement mechanism like futures contracts, when the price of perpetual contracts deviates from the spot price, most exchanges currently use the funding rate to adjust the contract price to keep it from deviating too far from the spot price. When the market trend is bullish, the funding rate is positive and will rise over time. In this case, long traders in perpetual contracts will pay funding fees to the opposing traders. Conversely, when the market is bearish, the funding rate is negative, and at this time, short traders in perpetual contracts pay funding fees to long traders.
0.02% means the long pays the short, indicating that the contract price is higher than the spot price.
7. What two operations does short selling essentially combine? Why short sell?
The strategy is to borrow and sell at a high price and then buy back after the price drops, so that you buy back at a low price and sell at a high price. Short selling is a way to profit from a decline in investment prices. Through research/analysis, if you have reasons to be bearish and short an asset, if the investment price decreases, you will gain profits. Generally, the lower the price drops, the more profit you make in the trade. For example, if the current price of Bitcoin is $60,000, and I predict that it will drop to $58,000 in the next few days, I will short it. If it doesn't drop but instead rises, I will incur a loss.
8. If the price of Ethereum is 1200, and you short a contract at 1x leverage with a margin of 2600, at what price of Ethereum would you be liquidated? A 1x short position will be liquidated at 2400 if it rises by 100% (1/1).
9. If the price of Ethereum is 1200 and you go long on a contract at 10x leverage with a margin of 2600, at what price of Ethereum would you be liquidated? Going long at 10x leverage, a 10% drop (1/10) will result in liquidation at 1080.
10. What is the initial margin used for?
The initial margin is the minimum margin required by the user when opening a position. For example, if the initial margin is set to 10% and the user opens a contract worth $1,000, the required initial margin would be $100, allowing the user to obtain 10 times leverage. If the available margin in the user's account is less than $100, the opening transaction cannot be completed.
11. What is the relationship between margin rate and leverage+?
Leverage = 1 / Margin Rate. The leverage is inversely proportional to the margin rate. For instance, if you want to trade 1 standard lot of USD/JPY without margin, you would need $100,000 in your account. However, if the margin requirement is only 1%, you only need to deposit $1,000 in your account. The leverage provided for that trade is 100:1.
12. How to explain the term 'anti-position+'? Hint (initial margin, maintenance margin)
Holding a position simply means the unwillingness to close the position to cut losses. The reasons are: unwilling to admit one's mistakes and not wanting to lose principal. So, one needs to hold the position until they can say, 'I was right,' feeling they have conquered the market.
13. How to explain the term liquidation? Hint (initial margin, maintenance margin). What is liquidation?
A liquidation occurs when your available margin is 0. Without available margin, you cannot trade. A trading liquidation occurs when the loss exceeds the available funds in your account after removing the margin. The remaining funds after forced liquidation are the total funds minus your losses, generally leaving some remaining.
14. Which is used to settle liquidations, the mark price or the latest price? What is the difference between the mark price and the latest price, and why have a mark price?
14. Which is used to settle liquidations, the mark price or the latest price? What is the difference between the mark price and the latest price, and why have a mark price? The mark price is used to calculate the user's unrealized profit and loss, the expected trigger liquidation price, and to tally the user's funding fees.
The purpose is to enhance the stability of the contract market and reduce unnecessary liquidations during abnormal market fluctuations. The latest market price refers to the current market price of the platform. The latest market price is always anchored to the spot price due to the funding fee mechanism, which is why the latest market price does not deviate too far from the spot market price.
15. Describe in your own words what unrealized profit and loss is.
Unrealized profit and loss refers to the profit or loss held by your current open orders. This equals the profit or loss that would be 'realized' if all your open orders were closed immediately. Unrealized profit and loss is also known as 'floating profit and loss' because this value constantly changes as your positions remain open. If you have open orders, your unrealized profit and loss will fluctuate with the current market price (or 'float'). For example, if you currently have unrealized profits, if the price moves against you, the unrealized profits may turn into unrealized losses.
16. Suppose your initial margin is 1000 USDT, the funding rate is 0.1%, and your leverage is 10 times long. If settled three times a day, how much funding fee do you need to pay/receive? 1000 USDT * 0.1% * 103 = 30 USDT.
17. Describe in your own words what hedging is.
Since contracts are a two-way transaction where both long and short can be bought, buying long while also shorting is equivalent to not losing or gaining, which is hedging. This is also called locking positions [because large losses can lead to liquidation or forced closure].
18. Which is less likely to be liquidated, low leverage or high leverage?
It cannot be said that low leverage is more dangerous or high leverage is safer; this is one-sided. The accurate statement is that under the same position, low leverage can withstand smaller fluctuations and is closer to the liquidation price. As for the choice of leverage, it is more about personal trading systems and habits. Any high return is certainly accompanied by high risk, which is terrifying when many discussions on contracts only emphasize contract returns without warning about risks.
Without wisdom, one must learn!
