Exploring liquidation mechanics in margin trade
The world of cryptocurrency trade has witnessed a significant increase in recent years, and new investors join the market every day. However, this rapid growth also comes with its fair part of the risks. One of the most critical concerns for merchants is margin trade, which implies borrowing funds from a brokerage to buy or sell cryptocurrencies at a higher price. Margin trade can be volatile and entails significant risks, including the possibility of liquidation.
What is liquidation?
The liquidation refers to the process by which the account of a merchant is closed due to excessive losses to minimize potential losses for all parties involved. It is often activated when a merchant does not meet its margin requirements or has exceeded the predetermined loss limits. In the context of cryptocurrency trade, liquidation usually occurs when the balance of a merchant’s account falls below a certain threshold.
Liquidation mechanics in margin trade
Margin trade liquidation implies several key mechanics:
- Margin requirements : Runners establish margin requirements to ensure that merchants have sufficient funds to cover possible losses. For example, if a merchant has a 3: 1 margin requirement and buys $ 100 in Bitcoin at $ 50, you must deposit $ 150 in your account.
- Loss limits : Some runners impose loss limits on merchants. If the balance of the account of a merchant falls below the specified limit, liquidation will occur.
- Account balances : The balances of the merchants are checked regularly to determine if they have met the margin requirements or if they have exceeded the loss limits. When this occurs, the liquidation begins.
- Umbales of liquidation : The runners establish specific thresholds for account balances that trigger the liquidation. These thresholds may vary according to the corridor and the negotiation strategy.
How the liquidation works
Here is an example of how liquidation in margin trade works:
- A merchant buys $ 100 in Bitcoin at $ 50 per unit.
- The merchant deposits $ 150 in his account, which meets the margin 3: 1.
- However, the operator exceeds the loss limit when buying another Bitcoin unit for $ 50 (total: $ 200).
- The corridor checks the account balance and determines that it has fallen below the specified threshold ($ 350).
- The liquidation begins and the merchant’s account is closed.
Consequences of the settlement
Liquidation in margin trade can have significant consequences for merchants:
- Account closure : liquidation of an account generally implies closing all open positions and transferring funds to a retention or effective account.
- Loss of profits : Merchants can lose some of their profits if liquidation occurs, since they will need to sell assets at the lowest market price.
- Rates and charges
: Broken rates, interest rates and other positions can be applied when accounts are closed.
Best practices to manage margin trade
To minimize the risk of liquidation in margin trade:
- Establish realistic expectations : understand that margin trade entails significant risks, including the possibility of liquidation.
- MONITOR Account balances : Regularly review the balances of the accounts to ensure that they meet the margin requirements and the loss limits.
- Maintain an adequate margin : Make sure enough funds are deposited in the account to cover potential losses.
- Diversify investments : Disseminate investments in multiple assets to minimize exposure to any asset.
- Use loss arrest orders : Establish detention orders to limit potential losses if market conditions change.
Conclusion
Liquidation in margin trade is a critical aspect of cryptocurrency trade, where merchants must balance the risk of profits with the need to administer their accounts effectively.