Standard margin evaluates each position on its own. Hold a long call and a short call further out, and each is margined separately even though the second cannot lose more than the spread between them.
Portfolio margin instead stresses the entire book against a range of hypothetical moves in spot and volatility, and charges margin based on the worst outcome. If a position is genuinely hedged, that worst outcome is small, and the margin required is correspondingly small.
Why it matters more in crypto
Because capital is expensive here. There is no prime broker extending credit across venues, and collateral cannot move instantly between them — the constraint behind cross-venue funding arbitrage. Margin efficiency is therefore a bigger determinant of what strategies are viable than it is in equities.
Multi-leg structures — spreads, straddles hedged with perpetuals, cash-and-carry — are often uneconomic under position-by-position margin and workable under portfolio margin. The strategy did not change; the financing did.
The failure mode it introduces
Portfolio margin computes a requirement from a stress scenario, and the scenario has bounds. A move beyond what the model stressed for, or a correlation that breaks — two legs that normally offset moving the same way — produces a margin requirement that jumps rather than drifts.
Under simple margin your requirement is knowable in advance and mostly static. Under portfolio margin it is a function of market conditions, and it rises fastest exactly when conditions deteriorate. A book that was comfortably margined can require substantially more without a single position changing.
The practical read
Portfolio margin is the correct tool for genuinely hedged books and a trap for books that merely look hedged. It rewards real offsetting risk and punishes assumed correlation — which is the same lesson as cross margin with correlated positions, arriving through a more sophisticated door.