A margin trader is a user who participates in Margin Trading, a strategy of trading crypto assets that involves borrowing funds and allows these traders to leverage positions with higher funds than they have.
If a margin trader's position is at a loss, they will cover the loss with funds in the margin trading wallet. The funds in the margin trading wallet serve as collateral.
The initial margin to open a position varies at different trading pairs.
For instance, to open a BTC/USD long position worth $10,000, the required equity in the margin wallet is $1,000 since the initial margin for this trading pair is 10%. Similarly, opening an ETH/USD long position worth $10,000 requires $2,000 in the margin wallet since the initial margin of this pair is 20%.
Note: To learn more about Margin Trading, read the article What is Margin Trading.
Why a position can be liquidated
A margin trader's position is forced-liquidated when the net value of their account falls below the maintenance margin. The maintenance margin varies at different trading pairs.
For instance, if a user with a BTC/USD position of an initial value of $10,000 and $1,000 collateral would lose $500 or more, the position will automatically be forced-liquidated.
Assume the Bitcoin price is $2500, and you have a $1,000 balance in your Margin Trading wallet. This would allow you to initiate a margin long position in BTC worth (up to) $10,000 (10000 / 2500 = 4 BTC). The $1,000 in your margin trading wallet serves as collateral. All additional funds required to open the position ($9,000) will be borrowed from liquidity providers in addition to the $1,000 collateral. The minimum needed margin is 5% of the position's value: 5% of $10,000 equals $500.
When the margin wallet's net equity reaches $500, the position will be forced-liquidated. This is true when the position's loss is $500; this occurs when the BTC price drops to $2,375, i.e. P/L = ($2,375-$2,500)*4 BTC
Let's assume the price drops to $2,375/BTC, and the position will be forced-liquidated. After forced liquidation, the trader will end up with a margin wallet balance of $500, and the borrowed $9,000 margin funding will have been returned to the funding provider.
Important: Fees and interest payments will cause these figures to change slightly. Also, the real liquidation price may be slightly lower than $2,375, like in the example, due to slippage, depending on available bids in the order book. This could result in a loss somewhat larger than $500.
If you have any questions, please feel free to reach out to Bitfinex Support. We are happy to help!