Under what circumstances will Bitcoin perpetual contracts be liquidated?

A margin call may lead to liquidation if the trader fails to maintain the necessary margin ratio set by the exchange, which can occur when the maintenance margin level falls below the trader's current margin ratio.

Dec 13, 2024 at 04:46 am

Under What Circumstances Will Bitcoin Perpetual Contracts Be Liquidated?

1. Margin Call

• A margin call occurs when the trader's margin ratio falls below the required maintenance margin level.
• The maintenance margin is a percentage of the trader's total position value that must be maintained in order to keep the position open.
• If the trader fails to meet the margin call by depositing additional funds or reducing their position size, the exchange will liquidate the position.

2. Stop-Loss Trigger

• A stop-loss order is a type of order that triggers the liquidation of a position when the market price reaches a predetermined level.
• Traders use stop-loss orders to limit their potential losses in case the market moves against them.
• If the market price falls below the stop-loss price, the exchange will liquidate the position.

3. Market Crash

• A market crash is a sudden and significant drop in the price of Bitcoin.
• If the market price drops below the liquidation price of the trader's position, the exchange will liquidate the position.
• Market crashes can happen due to various factors, such as negative news, regulatory changes, or macroeconomic events.

4. Exchange Error

• In rare cases, an exchange error can lead to the liquidation of a position.
• Exchange errors can occur due to software glitches, network disruptions, or human error.
• If an exchange error results in the liquidation of a position, the trader may be entitled to compensation from the exchange.

5. Force Liquidation

• Force liquidation is when an exchange forcibly liquidates a trader's position due to exceptional circumstances, such as a liquidity crisis or a regulatory shutdown.
• Force liquidations are typically executed to protect the exchange and other traders from financial losses.
• Traders may not be given advance notice before a force liquidation occurs.

Steps to Avoid Liquidation

• Maintain a sufficient margin level: Ensure that the margin ratio is always above the required maintenance margin level.
• Use stop-loss orders: Set stop-loss orders to limit potential losses and prevent the liquidation of positions in case of sudden price drops.
• Monitor market conditions: Stay informed about market news, economic data, and other factors that could affect the price of Bitcoin.
• Manage risk: Carefully assess the risks associated with cryptocurrency trading and invest only what you can afford to lose.
• Choose a reliable exchange: Select an exchange that has a good reputation and provides transparent trading conditions.