BHEX provides a variety of Vanilla Perpetual Contracts and Inverse Perpetual Contracts for a selection of cryptocurrencies. This article uses BTC’s vanilla and inverse contracts as an illustration in the forced liquidation mechanism to help you understand the risks.
- What is Liquidation？
In contract trading, a trader needs to commit a certain percentage of his/her trading fund to enter a position. This is called a margin. If the position has a margin rate of less than that of the maintenance margin rate, then a forced liquidation will be activated and the funds that were committed to the maintenance margin will be lost.
- What is Estimated Liquidation Price?
If you hold a long position and the “underlying index” of the contracts is lower than the estimated liquidation price, a forced liquidation will be activated.
If you hold a short position and the “underlying index” of the contract is higher than the estimated liquidation price, a forced liquidation will be activated.
BHEX liquidation price is based on the minimum maintenance margin ratio. Traders can view the contract maintenance margin ratio in the FAQ>Perpetual Contract “Risk Limit” section.
Vanilla contract risk limit and liquidation price:
Risk limit: https://bhex.zendesk.com/hc/en-us/articles/360039882773-V-Risk-Limit
Liquidation Price Formula:
Estimated Liquidation Price (Long) = (Position Size (Number of Contracts) * Contract Multiplier * Average Open Price-Initial Margin)/((1-Maintenance Margin Rate) * Contract Multiplier * Position Size)
Estimated Liquidation Price (Short) = (Position Size (Number of Contracts) * Contract Multiplier * Average Open Price+ Initial Margin)/((1+Maintenance Margin Rate) * Contract Multiplier * Position Size)
Margin Rate = (Initial Margin + Unrealized PnL) / Open Value = (Initial Margin + Unrealized PnL) / (Position * Face Value / Average Price)
Example:
Assume the current BTC transaction price is $10,000. A trader enters a long for 1,000 vanilla contracts with 10 times leverage at risk limit level 1, and the maintenance margin rate is 0.5%.
Now, the trader’s initial margin ratio is 1/10 = 10%
Initial Margin = Contract Multiplier * Quantity * Average Open Price / Leverage = 0.0001*1000*10000/10=100 USDT
The Estimated Liquidation Price (Long) = (Position Size (Number of contracts) * Contract Multiplier * Average Open Price-Initial Margin)/((1-Maintenance Margin Rate) * Contract Multiplier * Position Size)
(1000*0.0001*10000-100)/((1-0.5%)*0.0001*1000) = 9045.2261
When the underlying price is lower than 9045.2261, a forced liquidation will be activated.
Inverse contract risk limit and liquidation price:
Risk limits: https://bhex.zendesk.com/hc/en-us/articles/360036091753-V-Risk-Limit-
Liquidation Price Formula:
Estimated Liquidation Price (Long) = (1+Maintenance Margin Rate) * (Position Size (Number of Contracts) * Face Value/ ((Position * Face Value / Average Price) + Initial Margin)
Estimated Liquidation Price (Short) = (1-Maintenance Margin Rate) * (Position Size (Number of Contracts) * Face Value/ ((Position * Face Value / Average Price) - Initial Margin)
Margin Rate = (Initial Margin + Unrealized PnL) / Open Value = (Initial Margin + Unrealized PnL) / (Position * Face Value / Average Price)
Example:
Assume the current BTC transaction price is $10,000. A trader enters a long position of 1 BTC with 10 times leverage. The number of contracts is 10,000 at risk limit level 1, and the maintenance margin rate is 0.5%.
Now, the trader’s initial margin ratio is 1/10 = 10%
Initial Margin = Face Value * Position/ (Average Open Price * Leverage) = 1*10000 / (10000*10) = 0.1BTC
The Estimated Liquidation Price (Long): (1+Maintenance Margin Rate) * Position Size (Number of Contracts) * Face Value/ ((Position * Face Value / Average Price) + Initial Margin)
(1+0.5%)*10000*1/((10000*1/10000))+ 0.1) = 9136.36
When the underlying price is lower than 9136.36, a forced liquidation will be activated.
How to check the Forced Liquidation price:
WEB:
APP:
- Margin Call and Forced Liquidation Notification
When your margin ratio reaches the maintenance margin rate, BHEX will issue a notification to notify you of a margin call and a forced liquidation notification will be sent to you via SMS and Email.
SMS Notification:
Email Notification:
- How to view the historical record for forced liquidation
Traders may view the historical record of their forced liquidation from the contract trading page by scrolling down to the bottom to select ‘Order History.
WEB:
APP:
- How to prevent Forced Liquidation
BHEX uses isolated margin model. If a forced selling takes place, only the initial principle is forfeited. This will not affect other funds/assets in the account.
- BHEX uses underlying indexes as liquidation reference price to help to eliminate forced liquidation from any potential flash crash.
- Traders can increase or decrease the margin positions to help manage the risks. Leverage and liquidation price will change automatically following the changes made.
- Traders can set up a Stop-Loss to help gain control of the trades.