Contract Liquidation
In cryptocurrency contract trading, contract liquidation refers to the process where a trading platform force-closes positions or settles them according to rules due to insufficient margin in the user's account or contract expiration. The detailed analysis is as follows:
I. Trigger Mechanisms for Liquidation
1. Forced Liquidation due to Insufficient Margin (Liquidation)
Core Logic: When the user's maintenance margin ratio falls below the platform's set threshold (e.g., 0.5%), the platform automatically closes the position to prevent losses from expanding.
Maintenance Margin Ratio = (Account Equity / Position Value) × 100%
Example: Suppose a user goes long on 100 BTC contracts (valued at 1 BTC) with 10x leverage and a margin of 0.1 BTC. If the BTC price drops by 10%, the account equity falls to 0.09 BTC. The maintenance margin ratio is 0.09/1 = 9% (assuming the platform threshold is 5%), triggering liquidation.
2. Contract Expiration Liquidation
Delivery Contracts: Positions are force-closed at the agreed time (e.g., every Friday), and profits/losses are settled based on the index price (the average spot price of multiple exchanges).
Perpetual Contracts: No expiration date, but the funding rate is adjusted daily (e.g., 00:00 UTC) to adjust the position costs for long and short sides, preventing significant price deviations from the spot.
II. Liquidation Processes and Rules
1. Automatic Deleveraging (ADL)
When extreme market volatility prevents the system from liquidating positions in time, the platform prioritizes automatically reducing high-leverage profitable positions instead of directly liquidating loss-making accounts to minimize the risk of over-collateralization.
Application Scenario: During extreme market conditions, such as a sudden BTC rally pushing numerous short positions to the brink of liquidation.
2. Risk Reserves and Contribution
Risk Reserves: The platform extracts a fixed percentage (e.g., 0.05%) from each transaction as a reserve to cover liquidation losses.
Contribution Mechanism: If risk reserves are insufficient, remaining losses are shared proportionally by profitable users (some platforms have reduced contributions through optimized algorithms).
III. Impact of Liquidation on Users
1. Loss Calculation
Liquidation Loss: Typically the full or partial margin (e.g., a loss of 0.01 BTC in the example above).
Over-Collateralization Risk: In extreme market conditions, the liquidation price may deviate from expectations, causing losses exceeding the margin, which must be covered by risk reserves or user contributions.
2. Keys to Avoiding Liquidation
Control Leverage: Higher leverage increases liquidation risk (e.g., a 1% reverse price movement with 100x leverage may trigger liquidation).
Set Stop-Loss Orders: Preset stop-loss prices to close positions proactively before losses expand.
Monitor Margin Ratios: Stay vigilant about account risks and add margin or reduce positions promptly.
IV. Liquidation Differences Among Exchanges
Binance
Isolated/Full Margin Liquidation, ADL Prioritizes Deleveraging
Covers most extreme scenarios
Rare contributions
Bybit
Partial Liquidation
Over $100 million
No contributions since 2023
FTX (Bankrupt)
Inadequate reserves led to user contributions
Misappropriated customer funds caused shortfalls
Ultimately led to bankruptcy
V. Conclusion: Rational Approaches to Liquidation Risks
Nature of Contract Liquidation: A necessary mechanism for platforms to control systemic risks, but it may result in user principal losses.
Recommended Strategies:
Leverage ≤10x: Novices should avoid high leverage (e.g., 50-100x).
Always Set Stop-Loss: Configure stop-loss orders simultaneously with position opening (e.g., automatic closure at 10% loss).
Diversify Funds: Avoid allocating excessive funds to a single contract.
Monitor Market Conditions: Reduce positions before/after major events (e.g., Fed decisions).
For further analysis of specific platforms' liquidation rules or real-time risk calculations, feel free to provide more details!
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