A margin call is a warning issued by an exchange or trading platform when a trader's margin account balance falls below the required maintenance level due to losses on leveraged positions.
Margin Call
Margin Call Definition
A margin call is a warning issued by an exchange or trading platform when a trader's margin account balance falls below the required maintenance level due to losses on leveraged positions. It signals that the trader must deposit additional collateral or reduce their position to avoid liquidation.
Margin calls are most common in margin and derivatives trading, where traders borrow funds to increase their exposure to price movements.
What Does a Margin Call Mean in Crypto?
When trading on margin, users must maintain a minimum collateral ratio. If the value of the trader’s assets drops and the equity in the account falls below this threshold, the platform issues a margin call.
If the trader fails to respond by adding funds or closing positions, the exchange may automatically liquidate assets to cover the debt, potentially leading to substantial losses.
Example: A 10x leveraged Bitcoin position becomes vulnerable to a margin call if BTC's price drops just 10%, rapidly depleting the required margin buffer.
Consequences for Traders
- Forced liquidation of positions
- Loss of initial investment and borrowed funds
- Increased trading fees during volatile conditions
- Damage to trading reputation or account standing
How to Avoid a Margin Call in Crypto
- Use lower leverage to reduce risk exposure
- Monitor positions frequently, especially in volatile markets
- Set stop-loss orders to limit downside risk
- Maintain a healthy collateral buffer above the minimum margin requirement
- Stay updated on market conditions, news, and funding rates
Margin calls are a key risk factor in leveraged trading. Responsible risk management and real-time monitoring are essential to avoid them.
