Bybit liquidation is something no trader desires to experience. However, it is a necessary function of every exchange (spot or derivatives). It is defined as the closing of a trader’s position as the result of the initial margin level hitting the maintenance margin. The trigger for this is the mark price hitting the liquidation price ByBit.
Here is a comprehensive review on how liquidation works on Bybit exchange and how it is crafted in compliance with financial system to bring a more mature and fairer system to the crypto markets.
What is Bybit Liquidation?
Liquidation is the closing of a trader’s position due to the loss of all trader’s Initial Margin. This occurs because the user opted for leverage meaning the trade is made with a contract whose price is derived from any asset available not the asset itself.
There are two kinds of liquidations that a trader might face:
- Partial Liquidations: are a kind of ByBit liquidations that work to close a position partially early on to minimize the position and leverage used by a trader. These sort of Bybit price liquidations are used by the platform itself to mitigate risks for itself at the expense of user’s potential profits.
- Total Liquidations: on the other hand, total liquidations entirely close a position when all the user’s initial margin has been used. The platform takes this action to not take away the potential profits of traders as opposed to partial liquidations.
Initial Margin and Maintenance Margin
As the name implies initial margin is the asset or amount traders require to use from available margin to open the position selected with the desired leverage. Suppose if a trader opens a crypto position worth $1,000 by using 10x leverage against available initial margin, meaning the money coming from trader, would be $100. Although, exchanges normally offer upto 100x leverage but to avoid sudden Bybit liquidation it is safe to keep your leverage ratio lower.
Maintenance margin is the minimum required margin value to keep a position open. In contrast to what other trading platforms do, Bybit maintenance margin is fixed at 0.5% to the Bybit price liquidation and not the entry price, this means that your position is only liquidated when your initial margin has only 0.5% left. With this system, Bybit never partially liquidate a trader account and trader does not lose on potential profits unless the initial margin is entirely used.
Reasons Why Initial Margin Depletes
There are two main factors that contribute to the depletion of trader’s initial margin:
- The Use of Leverage
- The Contract Mechanism
Explaining leverage, it is a borrowed amount from the platform’s funds to open bigger position that one’s own funds permit.
For example, you have enough asset to enter 1 BTC position but the platform allows you to use leverage 100x leverage through which the trader can open 100 BTC position against own’s initial margin. Although, the trading platform only permits users to borrow the money on a condition that user would not lose any to avoid Bybit liquidation.
The main aspect to understand here is that while using leverage, traders buy a contract whose value is determined by any in their wallet asset and not the asset itself. This means that any profit, or loss, is then converted back to the asset whose price would also have changed during that time.
To understand it better here is another example, a user plan to goes long with 1 BTC with the BTC price at $4,000 and uses 1x leverage. The price falls to $2,000 and he is liquidated as he now lost $2,000 with his order AND that price of BTC also fell by $2,000, meaning he now lost all his margin. The same logic is also be applied to profits. This also means that while this aspect affects more low-leverage positions, high-leverage is risky and should always be done cautiously.
Note: As a trader may keep all the profits gained from that specific position, whereas margin is used preferentially when there are losses. So, if his position loses a total of 1 BTC’s worth out of the 10, the trader lost his entire initial margin as part of Bybit liquidation protocols.
Concluding it all, Bybit liquidation system is developed to make sure that traders benefit from a fairer and more human trading experience allowing them to optimize their potential profits. This is done by using a total Bybit price liquidation to protect traders’ potential profits due to market manipulations. This also portrays that Bybit can offer the safest, fairest, and the most competitive trading environment possible.