How does Bybit's forced liquidation mechanism work?

Bybit's liquidation system automatically closes leveraged positions when margin levels drop below a set threshold, protecting the exchange from significant losses.

Mar 29, 2025 at 02:42 pm

Understanding Bybit's Liquidation System

Bybit, like other cryptocurrency exchanges, employs a forced liquidation mechanism to mitigate risks associated with leveraged trading. This mechanism protects the exchange and other traders from significant losses caused by highly leveraged positions moving against the trader. It's crucial to understand how this works to avoid unexpected losses. The system is designed to automatically close a trader's position when their margin level falls below a certain threshold.

The Role of Margin and Leverage

Leverage allows traders to control a larger position than their account balance would normally permit. For example, 10x leverage means you can control a position ten times your initial investment. However, this magnifies both profits and losses. Your margin is the amount of your own funds you've committed to secure the leveraged trade. A higher leverage ratio means a smaller margin relative to the total position value.

Calculating Margin Level

Bybit calculates your margin level using the following formula: (Equity / Margin) * 100%. Equity is your account balance plus unrealized profits, minus unrealized losses. Margin is the initial margin required to open the position. When your margin level drops below the liquidation level, the system initiates a forced liquidation. This liquidation level is typically set slightly above the maintenance margin, offering a small buffer.

The Liquidation Process: A Step-by-Step Guide

• Trigger: Your margin level falls below the liquidation level, usually set around 80% to 100% of the initial margin, depending on the specific trading pair and leverage used.

• Automatic Order: Bybit automatically places a market order to close your leveraged position. This is done to minimize further losses. The order is executed at the prevailing market price.

• Liquidation Price: The price at which your position is closed is determined by market conditions. It's important to note that this price might be significantly unfavorable to you, especially in volatile markets.

• Loss Realization: After liquidation, the remaining funds in your account will reflect the losses incurred. If the losses exceed your available margin, your account balance might become negative. This can lead to further consequences depending on Bybit's specific policies.

• Order Cancellation (If Applicable): If the liquidation process fails to close the position completely due to insufficient liquidity, Bybit may attempt to cancel partially filled orders.

Factors Influencing Liquidation

Several factors influence the likelihood of liquidation. These include:

• Leverage: Higher leverage significantly increases the risk of liquidation, as even small price movements can drastically impact your margin level.

• Volatility: Highly volatile markets increase the chance of rapid price swings, pushing your margin level below the liquidation threshold.

• Position Size: Larger positions require more margin, making them more susceptible to liquidation.

• Slippage: Slippage, the difference between the expected price and the actual execution price, can exacerbate losses during liquidation and increase the chance of a margin call.

Understanding Bybit's Risk Management Tools

Bybit provides several tools to help manage risk and reduce the likelihood of liquidation.

• Stop-Loss Orders: These orders automatically close your position when the price reaches a predetermined level, preventing further losses.

• Take-Profit Orders: These orders automatically close your position when the price reaches a predetermined level, securing your profits.

• Margin Call: Before liquidation, you might receive a margin call, a warning that your margin level is getting dangerously low. This gives you a chance to add more funds or reduce your position size.

Common Questions and Answers

Q: What happens if my account balance goes negative after liquidation?

A: Bybit's policies on negative balances vary. It's crucial to review their terms and conditions. Generally, you might be required to deposit funds to cover the deficit.

Q: Can I prevent liquidation?

A: While you can't completely prevent liquidation, you can significantly reduce the risk by using appropriate leverage, implementing stop-loss orders, monitoring your positions closely, and understanding market volatility.

Q: How does Bybit determine the liquidation price?

A: The liquidation price is determined by the prevailing market price at the time Bybit executes the automatic market order to close your position. This price can be less favorable than expected due to market conditions and slippage.

Q: What is the difference between liquidation and a margin call?

A: A margin call is a warning that your margin level is low and approaching the liquidation threshold. Liquidation is the automatic closure of your position when your margin level falls below the liquidation level.

Q: Is there a way to appeal a liquidation?

A: Generally, Bybit's automated liquidation system is not subject to appeals. However, it's advisable to review their support channels for any exceptional circumstances. Preventing liquidation through careful risk management is always the best approach.

Q: How often does Bybit's liquidation system trigger?

A: The frequency of liquidations depends on market volatility and the number of leveraged positions. During periods of high volatility, liquidations can become more frequent.

Q: What are the fees associated with liquidation?

A: Bybit's fee structure for liquidations might vary depending on the specific trading pair and other factors. It's essential to check their fee schedule for detailed information. Liquidation fees are usually added to your losses.