How Does a Margin Call Work in a Leveraged Cryptocurrency Futures Trade?
A margin call occurs when the equity in a trader's margin account falls below the maintenance margin requirement, typically due to adverse price movements. The exchange or broker issues a call, requiring the trader to deposit additional funds (collateral) to bring the account back up to the required level.
Failure to meet the margin call results in the forced liquidation of the trader's position to prevent further losses.
Glossar
Margin Account
Leverage ⎊ A margin account in cryptocurrency, options, and derivatives trading represents an equity-backed loan from a broker, enabling traders to control a larger position than their available capital would otherwise permit.
Isolated Margin
Segregation ⎊ Isolated Margin is an account setting where the margin allocated to a specific derivative position is strictly segregated from the collateral supporting other positions, preventing losses in one trade from impacting the maintenance margin of another.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Forced Liquidation
Trigger ⎊ Forced liquidation occurs when a trader's margin account falls below a predetermined maintenance margin level, compelling the broker or protocol to automatically close positions.
Leveraged Cryptocurrency Futures
Contract ⎊ Leveraged cryptocurrency futures are derivative contracts obligating parties to transact a specific cryptocurrency asset at a predetermined price on a future date, utilizing a fraction of the total notional value as collateral.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.