Trading cryptocurrency Derivatives with high Leverage can be very profitable. On BTCMEX you can trade BTC/USD Perpetual Contracts with up to 100x Leverage. It allows traders to open positions and place orders that are significantly larger than their Initial Margin.
To keep the position open a trader needs to fulfill the maintenance requirement — hold a minimum percentage of the value of the position. When a trader is about to lose all of his Margin, his position is automatically liquidated.
Liquidation is an automatic closing of a position because the Mark Margin (based on the Mark Price) reaches the level of the Maintenance Margin, and the trader loses all his Margin. Liquidation is triggered by the Mark Price (average BTC market price), while the liquidated position will be automatically closed at the Last Traded Price (BTC price on the Exchange).
BTCMEX provides Bitcoin Perpetual Contracts trading with high Leverage. The value of your position is your Margin + Exchange Margin. Initial Margin is the percentage of the open position value held by you at the beginning. Maintenance Margin — a safety amount, calculated with the Mark Price, which is set by the exchange for Risk-Management purposes. It is the minimum value of the Margin a trader needs to have not to be liquidated. It’s calculated according to the Mark Price, which serves as a trigger for Liquidation.
The price at which Liquidation occurs always depends on the Leverage chosen, the Initial Margin value, and the Maintenance Margin value. The Liquidation Price will always be at a price better than the Bankruptcy Price, the price at which a trader would have lost all his Initial Margin.
BTCMEX uses a Dual-Price Mechanism, a condition when Liquidation is triggered by an average market price — Mark Price, and not the Last Traded Price of the exchange. Meanwhile, the position will be closed at the Last Traded Price.
The Dual-Price Mechanism is based on:
Mark Price — the average market price (Index Price) + a decaying Funding Basis.
Last Traded Price — the internal price on the exchange.
The Index Price is derived from the average BTC/USD price index of major exchanges. On BTCMEX it is calculated equally from three exchanges Kraken, Coinbase, and Bitstamp (33.33% each).
The Mark Price on BTCMEX is calculated as:
Mark Price = Index Price x (1 + Funding Basis)
You can read more about Dual-Price Mechanism here.
If there’s a price difference between the Bankruptcy Price and the price at which your position is closed during the Liquidation, if the value is positive, it will be added to the Insurance Fund, if the value is negative, it will be taken from the Insurance Fund to cover loss or trigger an ADL — Auto-Deleveraging.
To sum up, in Derivatives trading, Liquidation is a condition when a position is closed automatically once the Mark Price hits the Liquidation Price, and the trader loses his entire Margin.
To learn more about crypto Derivatives trading visit www.btcmex.com or check our guide to Bitcoin Perpetual Contracts.
Margin: The value of a position held by a trader. It is calculated according to the Last Traded Price.
Exchange Margin: The amount of money lent to a trader by the exchange.
Initial Margin: Amount of money a trader uses to open up a position.
Maintenance Margin: A minimum amount of a trader’s money he needs to keep his position open.
Dual-Price Mechanism: a condition when Liquidation is triggered by an average market price and not the internal price of the exchange.
