Forced liquidation

Eva opened a trade to benefit from a rise in Bitcoin’s price. Part of her account funds provides margin, the collateral backing that trade. Initial margin is needed to open it; maintenance margin is needed to keep it. As the price falls, Eva wants to wait for a recovery, but the exchange checks whether sufficient backing remains. Deribit, for example, intervenes automatically without a preceding margin call—a request to add funds. An email is a warning, not a promised grace period. Other platforms may work differently. The key point is that continuing to hold the trade is not solely Eva’s decision. [1] [2]

For simplicity, Eva has equity of 1,000 USD: her account’s value after including current gains or losses. In our model, assume a fixed maintenance requirement of 300 USD. A loss of 750 USD leaves equity of 250 USD. That is still positive, but it no longer covers the requirement. This gap explains why the system need not wait for zero. In practice, required margin and the recognized value of collateral also change. This is not a liquidation-price calculation, just an illustrative account example. A positive account value and sufficient backing are different things. [2]

An app may display an estimated liquidation price. It estimates a trigger under certain assumptions; it does not guarantee the closing price. Mark is a calculated price used in valuation and risk checks; an index is a reference assembled under market rules, and the last trade is an actual executed transaction. These values may differ. Closing depends on available opposing orders or another mechanism specified by the platform. A stop order has its own trigger and must still execute after being triggered. It therefore need not protect Eva from liquidation or secure the price she expected. [3]

Deribit describes incremental position reductions: the system intervenes, then checks again whether collateral is sufficient. If it is, remaining positions may stay open. Liquidation need not erase the entire portfolio. During the process on this platform, however, Eva cannot normally submit orders or cancel the liquidation engine’s orders. In a mode assessing the risk of the whole portfolio, the engine may even open hedging futures—offsetting trades intended to reduce price risk. Those trades can remain after liquidation ends. Eva needs to check the actual account, rather than assume that every position has disappeared. [1]

Alongside the losing trade, Eva has a profitable position. With cross-margin, however, collateral is assessed jointly within a defined account or portfolio. A loss elsewhere can therefore threaten the profitable position too. Segregated margin sets collateral apart for a particular part of trading, but its exact boundaries depend on the product. The mode’s name alone does not explain whether funds will be added automatically or how other obligations will be settled. Without reading the terms, one cannot promise that only the initial allocation to a single trade is at risk. The scope of shared backing matters more than one green profit figure. [1] [3]

Eva later discovers that watching price alone is not enough. Fees and funding—ongoing payments between the sides of a perpetual contract—may leave the account. If another asset provides collateral, its price can fall. The exchange may also recognize less than its full market value: reducing the accepted portion to allow for risk is called a haircut. Margin requirements themselves may change too. Eva therefore compares usable collateral with the current requirement in the same accounting currency. The original deposit or token count alone does not tell her how much backing remains. [1] [2]

Return to the point where Eva has equity of 250 USD. Suppose closing causes a further loss of 50 USD and a fee of 20 USD. With no other entries, 180 USD remains. Liquidation does not automatically mean losing everything. Yet this example promises no particular balance: a sharp move or worse execution can leave the account negative. The market’s rules then determine further settlement. Eva reads the final statement, including costs and any remaining positions, because a liquidation-trigger notification is not the final account. [1] [4]

If an uncovered loss remains after intervention, market rules determine how it is allocated. Mechanisms may include a liquidity provider taking over positions, automatic reductions of other traders’ opposing positions, an insurance fund, or losses shared among participants. Deribit and Coinbase International describe such mechanisms, but their conditions differ and not every step is available for every contract. An exchange fund is not statutory bank-deposit insurance or a guarantee that Eva gets her money back. It protects a defined part of the system under its rules, rather than promising to cancel every trading loss. [3] [4]