How Does ‘Liquidation’ Occur on a Crypto Futures Exchange?
Liquidation is triggered when a trader's margin balance falls below the required maintenance margin level. This typically happens due to adverse price movements against the trader's position.
The exchange's liquidation engine automatically takes over the position. It aims to close the position quickly to prevent the account balance from becoming negative.
Glossar
Account Balance
Holding ⎊ An account balance represents the aggregate value of a trader's assets and liabilities held within a specific platform or exchange.
Crypto Futures
Product ⎊ Crypto futures are standardized, exchange-traded contracts obligating the holder to buy or sell a specific quantity of a cryptocurrency at a predetermined price on a specified future date.
Margin Balance
Balance ⎊ The margin balance represents the net value of a trading account, reflecting the difference between the total collateral posted and the current realized and unrealized profit or loss on open positions.
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.
Adverse Price Movements
Volatility ⎊ Adverse price movements, particularly within cryptocurrency derivatives and options markets, represent deviations from anticipated price trajectories, often characterized by heightened instability and accelerated rate of change.
Liquidation Engine
Mechanism ⎊ A Liquidation Engine within cryptocurrency derivatives functions as an automated process triggered by margin calls, designed to mitigate counterparty risk for exchanges and lenders.