What Is a Margin Call in Crypto Trading?

What Is a Margin Call in Crypto Trading

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A margin call in crypto trading occurs when a trader has borrowed funds from a broker to trade with leverage, and the value of the trader’s account drops below a certain level, known as the margin maintenance requirement. At this point, the broker will typically require the trader to deposit additional funds or sell some of their assets to bring the account value back above the minimum threshold. If the trader cannot meet the margin call, the broker may liquidate the trader’s position to recoup the borrowed funds.

How Does it Work?

Sure, here is a practical example of a margin call in crypto trading:

A trader wants to trade with leverage and borrows $10,000 from a broker to trade Bitcoin. The broker sets a margin maintenance requirement of 20%, meaning the trader’s account value must remain above $8,000 at all times. The trader buys 1 BTC with the borrowed funds for $40,000.

The price of Bitcoin drops to $30,000, causing the trader’s account value to fall below $8,000. As a result, the broker issues a margin call and requires the trader to deposit additional funds or sell some of their assets to bring the account value back above $8,000.

If the trader cannot meet the margin call, the broker may liquidate the trader’s position and sell their 1 BTC at $30,000 to recoup the borrowed funds. The trader would then lose their initial investment and be left with a debt to the broker.

It’s worth noting that this is a simplified example; in practice, other factors like Mark Price, Liquidation Price, Maintenance Margin, Initial Margin, etc., can affect the margin call.

Margin Call vs. Mark Price vs. Liquidation Price vs. Mainfainence Margin vs. Initial Margin

  • Margin call: A margin call is a demand from a broker for a trader to deposit additional funds or assets into their account to bring the account value back above the minimum margin maintenance requirement.
  • Mark Price: The marked price is a theoretical or fair value used to calculate the value of a futures contract or options contract. It is used as a reference point for determining whether a position is in profit or loss and for calculating margin requirements. It is also used to trigger the liquidation of a position when the price drops below a certain level.
  • Liquidation Price: The liquidation price is the price at which a position will be automatically closed by the exchange or broker to prevent further losses. This price is typically set below the maintenance margin requirement and is used to limit the losses of a trader unable to meet a margin call.
  • Maintenance Margin: Maintenance margin is the minimum amount of equity that a trader must maintain in their account to keep a position open. It’s a percentage of the total value of the trade, and the exchange or broker sets it. Suppose the equity in an account drops below then. In that case, maintenance mar a margin call is issued, and the trader may be required to deposit additional funds or assets to bring the account value back above the minimum threshold.
  • Initial Margin: Initial margin is the number of funds a trader must have in their account to open a position. It’s a percentage of the total value of the trade, and the exchange or broker sets it. This margin covers potential trade losses and is typically higher than the maintenance margin.

In Summary

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The initial margin is the number of funds required to open a position; the maintenance margin is the number of funds required to keep a position open; the marked price is a reference point to determine whether a position is in profit or loss, liquidation price is the price at which a position will be automatically closed to limit losses and margin call is a demand from a broker for a trader to deposit additional funds or assets into their account to bring the account value back above the minimum margin maintenance requirement.

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