Main Takeaways
In crypto futures trading, liquidation occurs when the margin balance falls below the maintenance margin. The liquidation price is the point at which a trader’s position starts entering liquidation.
The bankruptcy price is the point at which a trader’s losses equal the collateral value deposited or the initial margin.
In a liquidation order, the liquidation price corresponds to the stop price, while the bankruptcy price is the limit price at which the order will be executed.
Traders often face liquidation in cryptocurrency futures. Beginners unfamiliar with cryptocurrency derivatives may find the execution of liquidation for their open positions confusing.
When trading perpetual contracts on Binance Futures, it's important to understand two key prices: the liquidation price and the bankruptcy price. These prices determine how a liquidation order is carried out.
In this guide, we'll explore what liquidation and bankruptcy prices mean for crypto traders and explain the roles of both thresholds in more detail.
What is Liquidation in Crypto?
Liquidation occurs when the margin balance falls below the maintenance margin. Margin balance is the sum of a wallet balance and unrealized PnL, while maintenance margin is the minimum amount of margin traders must maintain in order to keep their futures position open.
On Binance Futures, liquidation occurs at Mark Price, which is the estimated true value of a contract. The Mark Price considers an asset's fair value to prevent unnecessary liquidations during a volatile market. On the other hand, Last Price refers to the latest traded price of a futures contract on Binance.
Liquidation Price vs. Bankruptcy Price
Liquidation price is the price at which a position will start going into liquidation. There are several factors that can influence this threshold, including the leverage used, the maintenance margin rate, the cryptocurrency’s current price, and the trader’s remaining account balance.
The bankruptcy price is the price at which a trader's losses equal their deposited collateral or initial margin. In simpler terms, it’s the point at which the trader's margin balance hits zero.
How is a liquidation order executed?
Let's zoom in on how a liquidation order works with a simple example.
Imagine you buy $10,000 worth of Bitcoin when the price is $100,000 using 10x leverage, which means you only need to put up $1,000 of your own money (initial margin) along with a maintenance margin of $100.
If the market moves against you, it's crucial to know how liquidation and bankruptcy prices work. Here’s a breakdown:
Think of the two prices as steps in a safety mechanism. The liquidation price is the first step, aiming to mitigate outsize losses. If the situation worsens, the bankruptcy price represents the final stage where your funds are depleted.
In the next section, we’ll dive deeper into how Binance uses its Insurance Funds to manage the risks associated with the liquidation process.
How Binance Insurance Funds Protect Against Liquidation Risks
Binance Futures uses Insurance Funds to protect bankrupt traders from losses and guarantee that the profits of successful traders are fully paid out.
Traders are subject to liquidation when their collateral is less than their maintenance margin. When these traders are unable to sell their positions or have a negative account balance after all positions are liquidated, they are declared bankrupt. In this situation, Binance takes control of their remaining positions.
Suppose a trader's position is liquidated at a higher price than the bankruptcy price (meaning their losses do not surpass their initial margin). In that case, any remaining funds earned will go to the insurance fund.
However, if the liquidation price is lower than the bankruptcy price, the trader's losses would have exceeded their initial margin. In this event, the Insurance Fund will cover the deficit.
Final Thoughts
It’s vital to familiarize yourself with the concept of liquidation and how to prevent it before engaging in cryptocurrency derivatives trading. Liquidation occurs when an individual is unable to meet the required margin for their leveraged position.
To avoid liquidation, you should closely watch your margin ratio, use leverage responsibly, avoid accumulating more contracts in a losing position, and utilize trading tools such as stop-loss orders.
Further Reading
Three Misconceptions About Liquidations in Binance Futures
How to Reduce Your Chances of Getting Liquidated
How Liquidation Works in Futures Trading
Risk Warning: Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Futures trading, in particular, is subject to high market risk and price volatility. You may be called upon at short notice to make additional margin deposits or interest payments. If the required margin deposits or interest payments are not made within the prescribed time, your collateral may be liquidated. Moreover, you will remain liable for any resulting deficit in your account and interest charged on your account. All of your margin balance may be liquidated in the event of adverse price movement. Past performance is not a reliable predictor of future performance. Before trading, you should make an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances, including the risks and potential benefits. Consult your own advisers, where appropriate. This information should not be construed as financial or investment advice. To learn more about how to protect yourself, visit our Responsible Trading page. For more information, see our Terms of Use and Risk Warning.