
Back
Margin Call
What is a Margin Call?
A margin call in cryptocurrency trading occurs when the value of an investor's margin account falls below the required maintenance margin. It is a demand from a broker or exchange for an investor to deposit additional funds or securities to cover potential losses.
Key Aspects
Leveraged Trading: Primarily occurs in margin trading where borrowed funds are used.
Maintenance Margin: The minimum amount of equity that must be maintained in a margin account.
Account Monitoring: Brokers continuously monitor the value of margin accounts.
Investor Action Required: Traders must respond to margin calls by adding funds or closing positions.
Risk Management: A mechanism to protect brokers from client defaults.
How Margin Calls Work
Initial Margin: Trader deposits an initial amount to open a leveraged position.
Price Movement: Unfavorable market moves decrease the account's equity.
Margin Level: The ratio of equity to used margin is calculated.
Threshold Breach: If margin level falls below required maintenance margin, a call is issued.
Response Time: Traders typically have a limited time to respond to the call.
Causes of Margin Calls
Market Volatility: Sudden price movements against the trader's position.
Over-leveraging: Taking on positions too large relative to account equity.
Lack of Diversification: Concentrating risk in a single or few assets.
Insufficient Account Funding: Not maintaining adequate funds as a buffer.
Responding to Margin Calls
Depositing Funds: Adding more money to increase the account equity.
Closing Positions: Reducing exposure by closing some or all open trades.
Hedging: Opening opposing positions to mitigate losses.
Asset Liquidation: Selling other assets to meet the margin requirement.
Consequences of Unmet Margin Calls
Forced Liquidation: Broker closes positions to cover the margin deficit.
Trading Restrictions: Possible limitations on future trading activities.
Negative Balance: Potential to owe money if losses exceed account equity.
Credit Impact: May affect ability to trade on margin in the future.
Similar Terms
Liquidation Call: The forced closing of positions, often following an unmet margin call.
Collateral: Assets pledged to secure a margin loan, subject to margin calls.