This FAQ breaks down the margin call definition in simple terms, especially for those new to crypto. You'll learn what a margin call is, how it works, why it happens, and how to avoid it.

What is a margin call?

A margin call happens when your broker or exchange demands that you deposit more funds or collateral to cover potential losses on a leveraged position.

When you trade with leverage, you borrow money from the exchange. If the market moves against you and your account equity drops below a certain threshold (the maintenance margin), the exchange will issue a margin call. You must then add funds or close positions to bring your account back to the required level. If you don't, the exchange will automatically liquidate your position to recover the borrowed funds.

How does a margin call work in crypto?

In crypto trading, a margin call occurs when the value of your collateral falls below the exchange's maintenance margin requirement.

For example, if you open a $100 long position with 10x leverage, you only need $10 of your own money. If the price drops 10%, your position loses $10, wiping out your entire collateral. The exchange will then issue a margin call, asking you to add more funds. If you don't, they'll close your position, and you lose your initial stake.

Why does a margin call happen?

A margin call happens because the exchange needs to protect itself from losses when a trader's leveraged position moves against them.

When you trade on margin, you borrow funds from the exchange. If the value of your position falls, the exchange's loan becomes at risk. To ensure they can recover their money, they set a maintenance margin level. Once your equity falls below that level, they trigger a margin call to prompt you to add more collateral or reduce your position.

What happens if you ignore a margin call?

If you ignore a margin call, the exchange will automatically liquidate your position to recover the borrowed funds.

Liquidation means the exchange sells your assets at the current market price, which often results in a total loss of your initial margin. In extreme cases, if the market gaps and you owe more than your collateral, you may end up with a negative balance, meaning you owe the exchange money. To avoid this, always monitor your positions and set stop-loss orders.

How to avoid a margin call?

To avoid a margin call, use lower leverage, maintain a sufficient margin buffer, and set stop-loss orders.

  • Use lower leverage: The higher the leverage, the smaller the price movement needed to trigger a margin call.
  • Monitor your positions: Keep an eye on your account equity and be ready to add funds if needed.
  • Use stop-loss orders: These automatically close your position at a predetermined price, limiting your losses.
  • Diversify your portfolio: Don't put all your capital into one highly volatile asset.

By following these practices, you can reduce the risk of facing a margin call.

Margin call vs. liquidation: What's the difference?

A margin call is a warning; liquidation is the forced closure of your position when you don't meet the call.

When your equity drops to the maintenance margin level, the exchange sends a margin call. You have a short period (sometimes only minutes) to add funds or close positions. If you fail, the exchange proceeds with liquidation, selling your assets at market price to cover the loan. Liquidation often results in additional fees and a total loss of your margin.

What is the maintenance margin?

The maintenance margin is the minimum amount of equity you must maintain in your margin account to keep a position open.

It's expressed as a percentage of the total position value. For example, if the maintenance margin is 5%, you must keep at least 5% of the position's value in your account. If your equity falls below this, you'll get a margin call. Exchanges set different maintenance margins based on the asset's volatility and leverage.

Can you recover from a margin call?

Yes, you can recover from a margin call by depositing additional funds or closing some positions to increase your equity above the maintenance margin.

If you receive a margin call, act quickly. You can transfer more crypto or fiat into your trading account, or close part of your position to free up margin. Once your equity is back above the required level, the margin call is resolved, and you can continue trading. However, repeated margin calls can deplete your capital, so it's wise to reassess your risk management strategy.

Final Thoughts

Understanding margin calls is crucial for anyone trading with leverage in crypto. A margin call is not just a warning; it's a critical risk management tool that protects both you and the exchange.

By using lower leverage, monitoring your positions, and setting stop-loss orders, you can avoid the stress and financial loss associated with margin calls. Always remember that while leverage can amplify gains, it also amplifies losses. Trade responsibly.

We hope this FAQ has clarified the margin call definition and its implications. For more crypto education, stay tuned to our guides.