Margin Call

Margin Calls: A Beginner's Guide

Welcome to the world of cryptocurrency trading! You’ve likely heard about the potential for high profits, but also the risks. One of the most important concepts to understand, especially if you're using leverage, is a *margin call*. This guide will break down what a margin call is, why it happens, and how to avoid it.

What is a Margin Call?

Imagine you want to buy a house worth $200,000. You don't have $200,000 saved up, so you get a mortgage from the bank. The bank lets you borrow most of the money, but you need to put down a *deposit*, called a down payment – let’s say $20,000 (10%).

Margin trading in crypto is similar. You’re borrowing funds from an exchange, like Register now Binance, Start trading Bybit, Join BingX, Open account Bybit, or BitMEX, to trade with more money than you actually have. This is called *leverage*.

Your initial deposit, the amount you put up, is called your *margin*. If your trade starts to go against you – the price moves in the wrong direction – your margin decreases. A margin call happens when your margin falls below a certain level, determined by the exchange.

Think of it like this: the bank (the exchange) gets worried that you won't be able to repay your mortgage (the borrowed funds) if the house price (the crypto price) falls further. They ask you to put up more money to cover the potential loss.

In crypto, the exchange will ask you to add more funds to your account *immediately* to bring your margin back up to the required level. If you don't, they will *automatically close your position* to limit their losses. This is called *liquidation*.

Key Terms

Let's define some important terms:

**Leverage:** Using borrowed funds to increase your potential trading profit (and loss). For example, 10x leverage means you can control $10,000 worth of Bitcoin with only $1,000 of your own money.
**Margin:** The amount of your own money you put up as collateral for a leveraged trade.
**Margin Requirement:** The minimum amount of margin required to maintain a leveraged position. This is expressed as a percentage.
**Maintenance Margin:** The minimum amount of equity required in your account to keep a leveraged position open. If your equity falls below this level, a margin call is triggered.
**Liquidation:** The forced closing of your position by the exchange when your margin falls too low and you can't meet the margin call.
**Equity:** The current value of your assets in your margin account.

How Margin Calls Happen: An Example

Let's say you have $1,000 and decide to trade Bitcoin with 10x leverage on Register now Binance. This allows you to control $10,000 worth of Bitcoin.

You buy $10,000 worth of Bitcoin at $50,000 per Bitcoin.
Your margin is $1,000.
The maintenance margin is 5%. This means you need to maintain at least $500 in your account to keep the trade open ($10,000 x 5% = $500).

Now, let’s say the price of Bitcoin drops to $49,000.

Your $10,000 position is now worth $9,800.
Your equity is now $9,800 (position value) - $0 (borrowed amount) = $9,800.
Your margin is still $1,000.
Maintenance margin requirement is $9,800 x 5% = $490.

You're still above the maintenance margin!

However, if the price drops further to $48,000:

Your $10,000 position is now worth $9,600.
Your equity is now $9,600.
Your margin is still $1,000.
Maintenance margin requirement is $9,600 x 5% = $480.