What is Liquidity in Cryptocurrency? What are 3 Stages of liquidation?

What is Liquidity in Cryptocurrency?

Liquidity, in its most basic form, refers to how easily cryptocurrency can be converted into cash – and whether this can be done without negatively impacting the value of the asset. Often considered the most liquid virtual currency, Bitcoin is the first and most actively traded digital asset.

Margin trading allows a trader to use cryptocurrency borrowed from the exchange. Everyone knows that nobody lends money for free – when opening a trading position, an exchange client gives a pledge (Initial Margin) for capital management. Any platform that is at risk of losing money has the right to liquidate to protect itself from such losses.

Margin Trading: What is it?

Investing in margin involves investing more stock than an individual can afford to buy. Various stock brokers in India provide margin trading, which is also known as intraday trading. During margin trading, the buyer and seller of securities buy and sell securities at the same time. As time goes by, various brokerages have loosened their rules on time duration. In this process, investors attempt to predict stock movements in a certain session. Making money quickly through margin trading is a simple and effective strategy. The once specialized field has now become accessible to even small traders thanks to electronic stock exchanges.

Simple process to trade with a margin account:

You must request the opening of a margin account from your broker. This involves paying a certain amount upfront in cash to the broker, which is called the minimum margin. In case the trader loses his bet and fails to recover his money, the broker can be squaring off to recover some of his money.

After every trading session, you should square off your positions. It is necessary to sell shares if you have purchased any. At the end of the session, you’ll have to buy back any shares you sold. You will have to convert it to a delivery order after the trade, in which case you will keep the cash handy to pay for the shares you bought and the brokerage fees and additional charges.

Liquidation Price Calculation

An automatic estimate of the liquidation price will be provided when you open leveraged positions. The position is automatically liquidated if the cryptocurrency price crosses this mark.

Depending on the position, leverage, and remaining balance in the account of the trader, the liquidation price will vary. The mark is calculated automatically by the exchange, so you don’t need to calculate it manually. The calculator can be used to calculate the liquidation price on BitMEX or Binance, for example. Liquidation will take place in the event of a lower price change. It is common practice to set the liquidation price lower than the opening price when opening a long position. So, for a short position, upon exceeding the entry price, the asset will be liquidated.

Stages of liquidation:

To cover losses of bankrupt positions, the following methods are used in the exchange that cannot liquidate positions before the trader reaches a negative balance.

• Insurance fund: A fund that as the exchange’s responsibility to ensure that an individual incurred losses due to bankruptcy wouldn’t incur unnecessary losses in the future;
• System of “Socialized Losses”: Using this system, unprofitable positions are distributed evenly to the successful positions;
• Auto-deleveraging (ADL) liquidation: ADL determines the extent to which a trader’s position should be covered, based on the amount of profit they have made and the amount of time they have left in the market

 Two types of Leverage:

Isolated margin:

Only the pledge itself limits the collateral for a transaction. In other words, if the account is liquidated, the exchange will not withdraw all of the funds. If you hold just one position, you should use an isolated margin. The trader can increase the initial collateral of his transaction even after the deal is open by leveraging his remaining funds on the move.

Cross margin:

The client isn’t liquidated in the event of a cross margin or (spread margin). So, if one trade has profit then another one has a loss, whichever one has profit will automatically cover the other. The use of leverage is appropriate if you are trading multiple trading pairs at one time or performing arbitrage – that is, when you are trying to take advantage of the differential exchange rates between different exchanges.

To open a margin position, a trader does not need to use his entire capital as collateral.

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