cryptocurrencyIf you use leverage while trading with currencies, you will definitely encounter the term “Margin Call”. Margin Call is basically triggered when investors’ collateral falls below a certain level. In other words Margin callworks like an alert system to protect your account. However, if this warning is not managed correctly, it will lead to liquidation of assets. So how should you understand this risky situation and take precautions?
What is Margin Call and How Does It Work?
Margin Callis a risk management mechanism used in leveraged transactions. The broker or exchange notifies you that your collateral has fallen below the critical level due to loss. This warning is your last chance to close your position or deposit additional collateral. The main goal is to limit financial losses for both you and the platform.
For example, a thousand dollars worth of Bitcoin with 10x leverage $104,673.8 Let’s say you open the position. In this case, the total position value is 10 thousand dollars. If the price of Bitcoin drops by 10 percent, some of your collateral will be melted. Collateral rate When it falls below a certain threshold, the system automatically initiates a Margin Call.
The margin call is triggered when the collateral level falls below the limit called the “maintenance margin”. Each platform has a different maintenance margin rate. It is usually determined in the range of 50-150 percent. The collateral rate is calculated by the formula:
Collateral Ratio = (Equity / Collateral Used) x 100
Let’s say you have $5k in equity and $50k in Ethereum with 10x leverage 
$3,304.1 You opened the position. The collateral used is $5 thousand Ethereum. When the price of Ethereum drops and the equity becomes negative, the Margin Call comes into play as the collateral rate will also be negative.
Why is Leverage Ratio and Collateral Relationship Important?
Leverage ratio As it increases, the Margin Call risk also increases. High leverage means even small market movements can quickly deplete your collateral. If you are using 100x leverage, a 1 percent price increase or decrease can completely wipe out your equity.
Increasing the collateral is the most effective way to reduce this risk. For example, if you choose 2x leverage instead of 5x, you will have a wider range of action against market movements. Additionally, using stablecoins (USDT, USDC) as collateral slows down volatility-induced meltdown.
Here are the 5 most effective strategies you can use to avoid Margin Call:
- Keep Leverage Low: Don’t be fooled by the promise of high profits. More than 5x leverage increases risk exponentially.
- Use Stop-Loss: Set automatic stop-loss when opening a position. This controls maximum loss.
- Increase Collateral: Keep reserve funds in your account. The higher the collateral, the lower the Margin Call risk.
- Don’t Neglect Market Analysis: Follow the news and technical indicators. Be prepared for sudden price movements.
- Diversify: Don’t invest all your capital in a single position. Distribute your assets across different cryptocurrencies.
What Should You Do After a Margin Call Is Triggered?
When you receive a margin call, you must act quickly. The first option is to close the position directly. However, this means realizing the loss. The second option is to add collateral. You can increase your coverage rate by urgently depositing funds into your account.
Some platforms correct your margin ratio by automatically closing part of the position. In this case, check which assets are being sold. Monitor your portfolio regularly to keep track of your open positions.
Margin Call, leveraged transactionsIt is an inevitable part of. However, it is possible to minimize this risk with the right strategies. Choosing the leverage ratio wisely, using stop-loss and carefully analyzing the market are the most effective solutions. Remember that the cryptocurrency market has high volatility. Investing in this market without risk management causes you to lose your capital quickly.
Instead of fearing margin calls, you should learn to manage them. You should constantly review your margin and leverage level. In this way, you can make safer and more conscious transactions with cryptocurrencies.
Disclaimer: The information contained in this article does not constitute investment advice. Investors should be aware that cryptocurrencies carry high volatility and therefore risk, and should carry out their transactions in line with their own research.
