What Is the Difference between a ‘Soft’ and ‘Hard’ Liquidation?
A 'soft' liquidation is a more gradual process, often involving an automated deleveraging mechanism where a portion of the user's position is closed to bring the margin back above the maintenance level. A 'hard' liquidation involves the immediate and complete closure of the entire leveraged position once the maintenance margin is breached.
Soft liquidations are generally preferred as they minimize the impact on the market and the user's losses.
Glossar
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.
Leveraged Position
Amplification ⎊ A leveraged position within cryptocurrency, options, or derivatives fundamentally alters risk-reward dynamics through the utilization of borrowed capital or contractual obligations.
Automated Deleveraging
Mechanism ⎊ Automated Deleveraging is a backstop mechanism implemented by certain cryptocurrency derivatives exchanges to manage systemic risk following a large, unfillable liquidation event.
Soft Liquidation
Liquidation ⎊ A soft liquidation, within the context of cryptocurrency derivatives and options trading, represents a controlled reduction of exposure, typically occurring when margin requirements are breached but before a forced liquidation event is triggered by the exchange or clearinghouse.