The global financial markets recently witnessed a pivotal event: the long-anticipated Federal Reserve rate hike. On March 16, the FOMC announced a 25-basis-point increase (0.25%) in benchmark rates. Contrary to expectations, financial markets rallied post-announcement—stocks surged, cryptocurrencies rebounded, and Bitcoin gained 4.3% at its peak (per CMC data). This unexpected upward trend caught many traders off guard, particularly those who heavily shorted the market and faced liquidations.
What Is Liquidation?
In contract trading, participants must deposit a fraction of their position value as collateral—known as margin. There are two key types:
- Initial Margin: The capital required to open a position.
- Maintenance Margin: The minimum collateral needed to keep the position open. If available funds fall below this threshold, the system triggers forced liquidation (or "getting liquidated").
Calculation Example
(Using CoinEx’s tiered maintenance margin model)
Scenario: Trader A opens a 100x long position on 1 BTC at $40,000.
- Initial Margin = Position Value × (1/Leverage) = $40,000 × (1/100) = **$400**
- Maintenance Margin = $40,000 × 0.5% (margin rate) = **$200**
If losses reduce Trader A’s margin below $200, the position is liquidated.
Why Stop-Loss Orders Fail During Liquidation
During extreme volatility, limit-based stop-loss orders may fail to execute if prices shift faster than the order can fill. To mitigate this:
✔️ Use market orders for stop-losses to ensure immediate execution.
Managing Liquidation Risks
Crypto contracts amplify market risks through leverage. Follow these strategies to minimize losses:
1. Position Management
- Allocate ≤10% of capital per trade.
- Set stop-losses at ≤10% loss—exceeding this often signals a flawed trade direction.
- Lock in profits at predefined targets; avoid greed-driven delays.
2. Avoid Low-Liquidity Altcoins
Small-cap coins are prone to "wicking" (sudden price spikes/drops) due to shallow order books. Stick to major cryptocurrencies for stability.
3. Develop a Disciplined Strategy
- Study market trends.
- Execute trades based on analysis, not emotion.
FAQs
Q: Can liquidation occur even with sufficient margin?
A: Yes, during "flash crashes" where prices briefly breach liquidity thresholds before recovering.
Q: How do exchanges determine liquidation prices?
A: Platforms calculate based on maintenance margin rates and leverage. Higher leverage = higher liquidation risk.
Q: Is partial liquidation possible?
A: Some platforms close positions incrementally to reduce market impact.
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Disclaimer: This content is for educational purposes only and not investment advice.
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