How to Calculate Margin, P&L, and Liquidation Price for Perpetual Contracts (With Formula Breakdown)

Perpetual contracts have become the most traded instrument in cryptocurrency markets. However, as a unique crypto-native product, they operate differently from traditional financial instruments. This guide explains core concepts—margin requirements, profit/loss calculations, and liquidation prices—with simplified formulas.

Key Terminology Explained

What Are Perpetual Contracts?

• Futures: Agreements to buy/sell an asset at a predetermined price on a future date.
• Perpetual: No expiration date (unlike traditional futures requiring delivery).
• Contracts: Standardized terms for trading.

Contract Types

1. Linear (USDT-Margined) Contracts

   • Track BTC price, denominated in USDT.
   • Margin/collateral in USDT.
   • Ideal for beginners due to straightforward pricing.

2. Inverse (Coin-Margined) Contracts

   • Track BTC price but use BTC as collateral.
   • Example: 1 contract = 100 USDT face value.

Margin Calculation Formulas

Linear Contracts

Margin = (Contract Face Value × Contract Quantity × Mark Price) / Leverage

Example:
Buy 5 BTC contracts at $20,000 with 2x leverage (face value = 0.1 BTC/contract):
= (0.1 × 5 × $20,000) / 2 = $5,000 USDT

Inverse Contracts

Margin = (Contract Face Value × Contract Quantity) / (Leverage × Mark Price)

Same Example:
Buy 100 contracts (100 USDT face value each):
= (100 × 100) / (2 × $20,000) = 0.4 BTC (~$5,000 USDT equivalent)

Profit/Loss (P&L) Calculations

Linear Contracts

• Long: P&L = (Exit Price - Entry Price) × Face Value × Quantity
= ($25,000 - $20,000) × 0.1 × 5 = +$2,500 USDT
• Short: Reverse the price difference.

Inverse Contracts

• Long: P&L = (1/Entry Price - 1/Exit Price) × Face Value × Quantity
= (1/20,000 - 1/25,000) × 100 × 100 = +0.1 BTC (~$2,500 USDT at exit)
• Short: Invert the price terms.

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Liquidation Price Formulas

Linear Contracts

• Long: Liquidation Price = Entry Price × (1 - 1/Leverage)
$20,000 × (1 - 1/2) = $10,000
• Short: Entry Price × (1 + 1/Leverage)

Inverse Contracts

• Long: Entry Price × (1 - 1/(Leverage + 1))
$20,000 × (1 - 1/3) = $13,333
• Short: Entry Price × (1 + 1/(Leverage - 1))
  1x leverage shorts never liquidate!

FAQs

Q: Why use inverse contracts if linear ones are simpler?
A: Inverse contracts allow 1x leveraged shorts without liquidation risk—popular among bearish traders.

Q: How does leverage affect liquidation?
A: Higher leverage = smaller price movement triggers liquidation. 50x long liquidates at ~2% drop.

Q: Are contract face values standardized?
A: No—check exchange specifications. Common examples:

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Key Takeaways

• Margin: Determines position size relative to leverage.
• P&L: Linear contracts use absolute price changes; inverse contracts use relative (convex) changes.
• Liquidation: Inverse contracts have asymmetric thresholds—critical for risk management.

Always verify calculations with your exchange’s parameters.