The mechanism of how forced liquidation operates
Bitcoin futures liquidation refers to a system where the position is forcibly liquidated (cancelled) when the leverage x price volatility rate exceeds 100%. This is because when the loss exceeds 100%, there is no more margin left to lose, thus leading to the forced liquidation of the position.
- The concept of a long liquidation: For instance, if I contract a future long on one Bitcoin at $20,000 with ten times leverage, and the market price drops by 10.1%, this leads to 10 times x 10.1% = 100.1%, as can be understood from this example.
- The concept of a short liquidation: In the opposite scenario, if under the same conditions the price rises, then liquidation would be triggered, as can be understood.
Criteria for liquidation:
The liquidation criteria for coin futures trading differ among various international futures exchanges due to variations in margin ratio rules and calculation methods. Therefore, to determine the exact liquidation price, one must check the order history (Position) tab or calculate it after contracting a futures position.
As shown in the above image, once you enter a position, the detailed value is displayed as the Liquid (Liq) price.
Moreover, there is a simple method to understand the criteria for coin liquidation without calculating the exact values. Just refer to the following table.
Method to roughly calculate the liquidation price.
|the rate of change in the market price
The calculation method in this table was developed after carefully examining and approximating the detailed liquidation prices on Binance and Bybit exchanges, as described in Leisurely Person’s Blog
The importance of this calculation method stems from the need for immediate response in the volatile futures market. Continuously operating a liquidation price calculator for every position purchase can be cumbersome. By memorizing the table’s liquidation calculation method to some extent, you can quickly respond to target and stop-loss prices, which is beneficial especially for short-term futures traders.
However, since there is a range of error and the actual liquidation price may not be 100% accurate, it is recommended for those who trade with a clear plan to determine the exact liquidation price.
This includes people who trade slowly with limit orders, those who trade leisurely through swing and long-term investments. Even though it might be a bit cumbersome, it is better to calculate the value using the Bitcoin futures liquidation calculation method explained below.
Detailed Calculation Method for Futures Liquidation
The more detailed calculation for futures liquidation can be a bit cumbersome.
- Forced Liquidation Price = (Entry Price x Leverage) / [Leverage + 1 – (Maintenance Margin Ratio x Leverage)]
Generally, coin futures exchanges use the above formula for calculating the forced liquidation price. You can also use this formula for calculating liquidation on Binance futures.
The maintenance margin ratio for both Bybit and Binance is 0.005, and although there may be slight differences depending on the margin amount, those using less than about $40,000 in margin need not worry too much.
For example, if you enter a long position on BTC/USDT futures with 10x leverage at $20,000, you can calculate the result using the following formula:
- (20000X10) / [10+1-(0.005 X 10)] = 18264.8401826 USDT
If you entered a long position with 10x leverage at $20,000, your forced liquidation price would be 18264 USDT, which is about a 9-10% price movement in terms of coin price volatility.
What about a short position? The forced liquidation price formula for a short position can be calculated using the following formula:
- Forced Liquidation Price = (Entry Price x Leverage) / [Leverage – 1 + (Maintenance Margin Ratio x Leverage)]
In the [Leverage – 1 + (Maintenance Margin Ratio x Leverage)] part, simply changing the minus to a plus will allow you to calculate the forced liquidation price for a coin futures short position.
Alternatively, you can check the liquidation price using the forced liquidation price calculator provided on the Bitget futures trading page.
Where can I check the Bitcoin futures trading liquidation ratio?
The liquidation ratio for Bitcoin futures trading can be easily checked through statistics, showing which positions have been liquidated more frequently. CoinGlass, for example, provides liquidation ratios for all exchanges.
As seen in the image above, you can check which position’s coin liquidation ratio has occurred more frequently on a 4-hour basis.
In the case of Binance, about 71% of all users who entered long positions were forced into liquidation. This signifies that they were impacted by a strong downward trend over the past 4 hours.
Additionally, in the liquidation chart provided below, you can check the details of how much liquidation occurred at each date and time.
Such coin liquidation information can serve as an indicator for entering futures trades. You can start trading based on this information, along with coin technical indicators, chart information, and various other data.
What are the ways to reduce risk from Bitcoin futures liquidation?
There are various methods to reduce the risk of futures forced liquidation, even slightly. Notably, entering positions through futures cross mode and setting the SL stop loss function. Alternatively, adding margin funds whenever there is a risk of liquidation is also an option.
What happens if I don’t liquidate a futures position?
If you continue to hold a position without liquidating, you may have to keep paying the funding fee, or forced liquidation may be triggered. The funding fee can be significantly high, especially as the margin increases, and if luck is not on your side, you may find yourself continually paying for a single position.