In the world of contract trading, leverage is an inevitable option, which means both high rewards and high risks. To minimize the probability of cascading liquidations and bankruptcies, the contract trading market implements an "early liquidation" mechanism. For example, if you use $10,000 in BTC with 10x leverage to go long, your position will be forcibly closed once your margin loses 90%. Therefore, contract trading is tailored for advanced players with precise market judgment. In highly volatile markets, reckless gamblers without risk awareness will inevitably face liquidation.
Will You Owe Money After a Bitcoin Contract Liquidation?
Yes, extreme cases can occur where traders owe additional funds after liquidation. Here's an example:
Suppose Xiao Hei predicts that Voice's release and official EOS利好 (positive news) will drive EOS prices up. He opens a leveraged EOS futures contract (10x) to go long. If EOS drops to his liquidation price of ¥20 and he fails to add margin, the exchange will forcibly close his position.
Possible Outcomes:
Regular Liquidation
- If the position is sold at ¥20, Xiao Hei retains 10% of his margin (standard for 10x leverage). Some exchanges may confiscate this remaining margin for their risk reserve fund.
Underwater Liquidation (穿仓)
- In extreme crashes with low liquidity, the position might sell below ¥20 (e.g., ¥19), causing losses exceeding 100% of the margin. Here, Xiao Hei owes the exchange money.
Who Covers the Loss?
- Risk Reserve Funds: Most platforms use these to cover underwater losses.
- Loss Sharing (穿仓分摊): Some exchanges require profitable traders to contribute a percentage (e.g., 2%) of their gains to offset losses.
Note: Many modern exchanges (e.g., 58COIN) absorb underwater losses via risk funds, eliminating user liability—a more trader-friendly approach than traditional platforms.
FAQs
1. What triggers a forced liquidation in contract trading?
Forced liquidation occurs when your margin drops below a threshold (e.g., 90% loss with 10x leverage), prompting the exchange to close your position automatically.
2. Can you lose more than your initial margin in contract trading?
Yes, in rare "underwater liquidation" scenarios where the position cannot be sold at the expected price, traders may owe additional funds to the exchange.
3. How do exchanges handle underwater losses?
Most use risk reserve funds or loss-sharing mechanisms where profitable traders contribute a small percentage of gains to cover the deficit.
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Key Terms: Bitcoin contracts, liquidation risks, underwater liquidation, loss sharing, risk reserve funds, leveraged trading.