Why does liquidation happen?
To prevent the loss of your position being greater than your margin balance and causing you went to bankruptcy (margin balance become negative), system has set a minimum margin requirement for each kind of contract, the requirement called maintenance margin.
When your margin balance is equal to or less than the maintenance margin requirement, the system will execute liquidation process.
What will happen when liquidation occurred?
- When the liquidation occurred, system will take over your position and the remaining margin balance, then attempt to close the position at bankruptcy price.
- If the position can’t be closed at the bankruptcy price, the system will attempt to draw extra margin from BTSE insurance fund to further lower/raise the price up to 1% to increase the chances of successfully closing the position.
- If the position still can't be closed after the further adjustment, system will trigger auto-deleveraging (ADL) process,matching opposite position(s) to close off the liquidated position in a systematic manner. The position size of both sides will keep reducing until the position being fully liquidated. The priority of being auto-deleveraged by the liquidation engine is determined by the profit and leverage level of the counterparty position.
How does the system decide when to trigger the liquidation process?
When you get into a position, system calculates a liquidation price for your reference. When the Mark Price* breaches your liquidation price, that means your margin balance can no longer fulfill the maintenance margin requirement. The liquidation process will be triggered automatically at this point.
* To prevent the market price being manipulated and causing a large number of users to be liquidated, BTSE uses the Mark Price (a relatively fair price that weighted by multiple prices) as the basis for triggering the liquidation process.
How to avoid liquidation? How to avoid losing more than expected?
You can try the following methods to reduce the risks of being liquidated or losing more than expected:
1. Keep an eye on the maintenance margin conditions and use an appropriate leverage ratio.
For example, the BTC contracts only require 0.5% of the notional value as their maintenance margin, but the USDT contracts require 4.5%.
If you are used to trading with the maximum leverage ratio, please note that different currency of contracts may have different maintenance margin conditions. Please choose an appropriate leverage ratio to avoid being accidentally liquidated.
2. Keep an eye on the liquidation price and refill the margin balance in time.
When the mark price getting close to your liquidation price, you can refill the margin balance in time to keep the liquidation price away from the mark price. This can be achieved by depositing more margin collateral into your futures wallet.
3. Setting up a stop loss point, close the position before being liquidated.
You can set up a Stop Order in advance. When the trend of the market price is not as you expected, the system can trigger the stop order based on the trigger price you set forth.
4. Only place the amount you are willing to take the risk.
In addition to the above, you can also control the amount of margin balance to avoid losing more than expected.
You just earned a profit of 1000 USD, but you only willing to take the risk of 500 USD.
You can transfer 500 USD back to your spot wallet to avoid the unexpected loss caused by the system automatically refilling the margin.
How is maintenance margin calculated?
Maintenance Margin = Notional Value x Maintenance Margin%
Notional Value = Mark Price x Position Size x Contract Multiplier
For example, when you buy the long contracts of BTC with the following conditions:
- Market Price: 9000 USD
- Size: 100 (contracts)
- Liquidation Price: 8800 USD
According to the contract specifications, the maintenance margin requirement for BTC contracts is 0.5% of the notional value. Each BTC contract represents 0.001 BTC. Hence the maintenance margin of this position will be:
8800 x 100 x 0.001 x 0.5% = 4.4 USD
Risk comparison under different leverage ratios
- When you choose 100x leverage (or Cross Mode) and provide only 1% margin balance, you will have a margin of error of less than 0.5%
Margin of Error
- When you choose 1x leverage and provide 100% margin balance, you will have a margin of error around 99.5%
Margin of Error
* The examples here are approximations without accounting for trading fees and funding fees.
Compared to the high leverage, the low leverage will significantly increase the risk-taking ability of the position and reduce the risk of liquidation.
Users are advised to carefully evaluate your risk-taking ability and choose a suitable leverage ratio.