Why does liquidation happen?

To prevent the loss of your position being greater than your margin balance and causing you to go into bankruptcy (margin balance become negative), the system has set a minimum margin requirement for each kind of contract called the maintenance margin.
When your margin balance is equal to or less than the maintenance margin requirement, the system will execute the liquidation process.

What will happen when liquidation occurs?

• When liquidation occurs, the system will take over your position and the remaining margin balance, then attempt to close the position at the bankruptcy price.
• If the position can’t be closed at the bankruptcy price, the system will attempt to draw extra margin from BTSE's insurance fund to further lower/raise the price to increase the chances of successfully closing the position.
• If the position still can't be closed after further adjustment, the 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 is 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, the 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.
* Mark Price: A relatively fair price weighted by multiple prices. To prevent the market price being manipulated and causing a large number of users to be liquidated, BTSE uses the Mark Price 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 risk 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, BTC contracts only require 0.5% of the notional value as their maintenance margin, but USDT contracts require 4.5%.
If you are used to trading using the maximum leverage ratio, please note that the varying currencies 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 gets close to your liquidation price , you can refill the margin balance in time to keep the liquidation price from reaching the mark price. This can be achieved by depositing more margin collateral into your futures wallet.

3. Setting up a stop loss point and 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 in accordance with the risk you are willing to take. 

In addition to the above, you can also control the margin balance to avoid losing more than expected.

For example:
You just earned a profit of 1000 USD, but you are only willing to take a 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 initial margin calculated?

Initial Margin = Notional Value x Initial Margin%

Notional Value = Mark Price x Position Size x Contract Multiplier

For example, when you buy long contracts of BTC with the following conditions:

- Market Price: 9000 USD

- Mark Price: 9001 USD

- Position Size: 100 (contracts)
- Contract Multiplier: 0.001
- Initial Margin: 1%

According to the contract specifications, the initial margin requirement for BTC futures contracts is 1%, and the contract multiplier is 0.001.
Hence the maintenance margin of this position will be: 9001 x 100 x 0.001 x 1% = 9.001 USD

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 long contracts of BTC with the following conditions:

- Market Price: 8830 USD

- Mark Price: 8800 USD

- Position Size: 100 (contracts)
- Contract Multiplier: 0.001
- Maintenance Margin: 0.5%

According to the contract specifications, the maintenance margin requirement for BTC futures contracts is 0.5%, and the contract multiplier is 0.001.
Hence the maintenance margin of this position will be: 8800 x 100 x 0.001 x 0.5% = 4.4 USD

How to calculate the approximate liquidation price?

Liquidation Price = Entry Price - Affordable Loss Per Coin

# Affordable Loss Per Coin = Affordable Loss / (Position Size * Multiplier)

# Affordable Loss = Available Margin Balance + unrealized PnL - Maintenance Margin - 2 Taker Fees - Funding Fee
# Long Position Unrealized PnL= (Mark Price - Entry Price ) * Position Size * Multiplier
# Short Position Unrealized PnL= (Entry Price - Mark Price ) * Position Size * Multiplier

# Maintenance Margin = Maintenance Margin% * Notional Value

# Taker Fees = Taker Fees% * Notional Value

# Founding Fees = Founding Fees% * Notional Value

# Notional Value = Mark Price * Position Size * Multiplier

Note: Both the entry and settle positions will be charged trading fees. To simplify the calculation, assume both fees are charged by the taker fee %

For example, you have a BTC Perpetual Long Position as below:

- Position Size: 1,000 contracts
- Contract Multiplier: 0.001

- Entry Price: 9,000 USD
- Mark Price: 8,999 USD

- Maintenance Margin %: 0.5%

- Taker Fee %:  0.06 %

- Funding Fee %: 0.0013 %
- Available Wallet Balance: 300 USD

Step 1. Affordable Loss = Available Margin Balance + unrealized PnL - Maintenance Margin - 2 Taker Fees - Funding Fee

300 + ((8,999 - 9,000) * 1000 * 0.001) - (8,999 * 1000 * 0.001 * 0.5%) - (9,000 * 2 * 1,000 * 0.001 * 0.06%) - (8,999 * 1,000 * 0.001 * 0.0013%) = 243.09 USD

Step 2. Affordable Loss Per Coin = Affordable Loss / (Position Size * Multiplier)

242.09 / (1,000 * 0.001) = 243.09

Step 3. Approximate Liquidation Price = Entry Price - Affordable Loss Per Coin

9,000 - 243.09 = 8756.91

When the Mark Price is equal to or lower than 8756.91, the position will get liquidated.

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%
   

• When you choose 1x leverage and provide 100% margin balance, you will have a margin of error of around 99.5%
   

* The examples here are approximations without accounting for trading fees and funding fees.

Compared to high leverage, low leverage will significantly increase the risk-taking ability of the position and reduce the risk of liquidation.
Users are advised to carefully evaluate his/her risk-taking ability and choose a suitable leverage ratio.