Inverse vs linear contracts: coin-margined vs USD-margined futures
The choice between inverse and linear contracts looks like a settlement detail — which currency the profit arrives in. It is actually a choice about what your collateral is exposed to, and that changes your effective position size, your liquidation distance and the formula for PnL.
This page explains the generic mechanism. It deliberately quotes no venue’s contract specifications, face values or fees; every number below is illustrative and labelled as such. Check your venue’s contract spec page for the real ones.
Short answer
- You count your results in dollars and hold stablecoins → linear contracts are the simpler fit. PnL is in the currency you already think in, and the formula is a straight line.
- You hold the coin anyway and count your results in it → inverse contracts let the coin itself be the margin, with no conversion step.
- You want to hedge coin you already hold against a dollar price fall → a short inverse position of the same dollar size is the textbook construction (worked through below).
- You are running a directional long with leverage → be aware that an inverse long with coin collateral carries more price exposure than its position size suggests.
What they have in common
Both are derivatives on the same underlying price, and both usually come in perpetual and dated forms — the perpetual vs dated futures distinction is separate from this one. Both use initial and maintenance margin, both can be liquidated, and in both cases leverage does not change the dollar profit of a trade.
Where they actually differ
What a contract is
A linear contract is sized in the base asset: a quantity of 0.2 means 0.2 coins of exposure. Margin and PnL are in the quote currency, typically a stablecoin.
An inverse contract is sized in dollars. Each contract has a fixed USD face value set by the venue. Margin, PnL and fees are all paid in the base coin.
The PnL formula
linear, long: PnL (quote) = quantity × (exit − entry)
inverse, long: PnL (coin) = contracts × face value × (1/entry − 1/exit)Shorts flip the sign in both. The linear version is the one in how to calculate futures PnL; the inverse one works with reciprocals of price because the position is a fixed number of dollars, and the number of coins those dollars represent changes as price moves.
Example (illustrative). A long of 10,000 USD of face value on an inverse contract, entered at 50,000. At entry that is 0.2 coins of notional.
| Exit price | Inverse long PnL (coin) | Same, valued at exit (USD) | Linear long, 0.2 units (USD) |
|---|---|---|---|
| 40,000 | −0.050000 | −2,000 | −2,000 |
| 45,000 | −0.022222 | −1,000 | −1,000 |
| 55,000 | +0.018182 | +1,000 | +1,000 |
| 60,000 | +0.033333 | +2,000 | +2,000 |
| 100,000 | +0.100000 | +10,000 | +10,000 |
Where the non-linearity actually is
Inverse contracts are usually described as having a “non-linear payoff”, and it is worth being precise about where.
In coin terms, it is non-linear. A 10% rise pays the long 0.018182 coin; a 10% fall costs 0.022222. As price rises without limit, the long’s coin gain approaches the notional of 0.2 coin and never exceeds it. As price falls toward zero, the coin loss is unbounded. The short is the mirror image.
Converted to dollars at the exit price, the PnL alone is linear — the last two columns match exactly. So if you convert every profit to stablecoin the moment you close, the payoff of the position by itself behaves like a linear one. What differs for a dollar-counting trader is the collateral.
What the collateral is exposed to
With an inverse contract your margin is the coin. The coin’s dollar value moves with the same price the position is tracking, so a long inverse position backed by coin collateral is long twice: once through the position and once through the collateral.
Example (illustrative). The same 10,000 USD long at 50,000 and 10×, backed by 0.02 coin of collateral (1,000 USD at entry), compared with a linear long backed by 1,000 USD of stablecoin:
| Price | Inverse, coin collateral: account in USD | Linear, stablecoin collateral: account in USD |
|---|---|---|
| 45,000 | −100 | 0 |
| 50,000 | 1,000 | 1,000 |
| 55,000 | 2,100 | 2,000 |
The extra ±100 is the 0.02 coin of collateral gaining or losing 5,000 per coin. (In practice the inverse long would already have been liquidated by 45,000 — see the next table.) The effect is small at 10× and proportionally larger at low leverage, where the collateral is a bigger share of the exposure.
Liquidation distance
That extra exposure moves liquidation. Ignoring the maintenance margin requirement and fees for clarity, the price move at which equity reaches zero:
| Leverage | Linear long | Inverse long | Linear short | Inverse short |
|---|---|---|---|---|
| 5× | −20.00% | −16.67% | +20.00% | +25.00% |
| 10× | −10.00% | −9.09% | +10.00% | +11.11% |
| 20× | −5.00% | −4.76% | +5.00% | +5.26% |
An inverse long is closer to liquidation than a linear long at the same leverage, and an inverse short is further away. Real liquidation prices sit nearer than these because maintenance margin is not zero — see how liquidation price is calculated and check the figure your venue shows. The liquidation price calculator on this site uses the linear formula, so do not feed it an inverse position.
The hedge construction
The mirror effect makes inverse shorts useful for hedging coin you hold.
Example (illustrative). Hold 0.2 coin at 50,000 as collateral and short 10,000 USD of inverse contracts:
| Price | Account in coin | Account in USD |
|---|---|---|
| 40,000 | 0.250000 | 10,000 |
| 50,000 | 0.200000 | 10,000 |
| 60,000 | 0.166667 | 10,000 |
The dollar value holds still while the coin balance absorbs the move. That ignores fees and funding, which on a perpetual will move the result over time.
Fees and sizing units
On inverse contracts, fees are charged in coin on the coin value of the notional, so a fee paid at a higher price is fewer coins. Order sizes are in contracts rather than coin quantities, which is a frequent source of off-by-a-factor bugs in code that handles both types — see symbol filters and minimum order sizes.
Which to pick
| Your situation | Pick | Why |
|---|---|---|
| You account in dollars, hold stablecoins | Linear | PnL and margin in your unit; simplest arithmetic |
| You hold the coin long-term and account in coin | Inverse | No conversion; margin is what you already hold |
| You want to hedge held coin in dollar terms | Inverse short, 1× | Collateral and position offset each other |
| Leveraged directional long, dollar-accounted | Usually linear | Avoids the doubled exposure through collateral |
| Code that sizes orders automatically | Whichever you test | Contract vs coin units are the common bug |
Neither is better in general. They answer different questions about what your unit of account is.
Can you use both
Yes. Keep two things straight. A long on the inverse contract and a short on the linear one are two separate instruments, not one netted position — each has its own margin and its own liquidation price, so check how your venue’s margin mode treats them. And some venues let coin act as collateral for linear contracts too, which recreates the collateral exposure described above even though the contract itself is linear.
FAQ
What is the difference between inverse and linear futures?
A linear contract is sized in the base coin and pays PnL in the quote currency, usually a stablecoin. An inverse contract is sized in US dollars and pays PnL, margin and fees in the base coin. The practical consequence is that inverse collateral moves with the price of the coin, which changes your total exposure and your liquidation distance.
Why is inverse contract PnL called non-linear?
Because measured in coin, a price rise earns a long fewer coins than an equal price fall costs it, and the long’s maximum coin gain is capped at the position’s coin notional. Converted to dollars at the exit price, the position’s PnL alone behaves linearly. The dollar difference comes from the coin collateral, not from the payoff formula.
Is an inverse long riskier than a linear long?
With coin as collateral, it carries more price exposure than its position size suggests, because the collateral falls in value on the same move that makes the position lose. Ignoring maintenance margin, a 10× inverse long reaches zero equity after about a 9.09% fall, against 10% for a linear long at the same leverage.
How do you hedge coin with inverse contracts?
Short inverse contracts with a dollar face value equal to the dollar value of the coin you hold as collateral. Gains and losses on the short then offset the change in the collateral’s dollar value, so the account’s dollar value stays roughly constant. Fees and funding still move it over time.