Margin Calls in Crypto: Meeting Maintenance Margins
Margin Call is a situation where the value of an investor’s account falls below the amount of margin maintenance.
What is Margin Call?
An investor’s margin account is an asset purchased with borrowed funds. As a rule it is a combination of personal funds of a cryptocurrency trader and borrowed money. In this case broker will ask investor to deposit additional money or securities in order to reach the minimum required service amount to continue trading.
If it is not possible to replenish the account, then closing the position becomes unavoidable. The broker company can do this without the trader’s consent. Sometimes traders may also calculate the exact amount to which an asset must fall in order for the margin call to be executed.
To reduce risk and prevent a margin call from being triggered, they may use stop orders. A stop order is an order to buy or sell an asset on a trading floor, including cryptocurrency exchanges. They are designed to prevent huge losses in times of excessive swings and wild volatility.