Forced Liquidation

1. About Liquidation 

Forced liquidation refers to the mandatory closure of a user's position when the margin is insufficient to meet the maintenance margin level, resulting in the loss of all position margin used for that position. When the mark price reaches the liquidation price, forced liquidation is triggered.

2. Margin Ratio

After a user opens a position, forced liquidation will be triggered when the margin ratio is ≥100%.

• Cross Margin: Margin Ratio = Sum of "Maintenance Margin" for all positions / (Account Available Balance + Sum of Unrealized PnL)
• Isolated Margin: Margin Ratio = Position "Maintenance Margin" / (Position Margin + Unrealized PnL)

About Maintenance Margin Rate

3. Estimated Liquidation Price 

Estimated Liquidation Price When the contract price reaches a certain level and unrealized losses reach a certain threshold, the margin ratio hits the minimum maintenance margin ratio. At this point, the maintenance margin ratio equals the minimum maintenance margin ratio, and this price is referred to as the estimated liquidation price.

Liquidation refers to the process of closing a position at the bankruptcy price (the level when the margin is 0%). This occurs when the position's margin balance falls below the maintenance margin requirement. For instance, if the liquidation price is $15,000 USDT, and the current mark price is $20,000 USDT, the position will be liquidated when the mark price drops to $15,000 USDT. This implies that the mark price has reached the liquidation price, and the unrealized loss on the position has reached the maintenance margin level, triggering the liquidation.

Liquidation Price Calculation in Different Margin Modes:

1. Cross Mode:

In Cross mode, the liquidation price is calculated based on the total account balance, and the entire account balance is shared among all open positions. If the total account balance falls below the maintenance margin required for a position, the position may face liquidation.

• liquidation price (LP)
• Initial Margin Rate(IMR)
• Maintenance Margin Rate (MMR)

The LP is calculated using the following formula:

- For Long Position (Buy): LP = [Entry Price * (1-IMR + MMR)] - ( Additional Margin/ Position Quantity)
- For Short Position (Sell): LP = [Entry Price * (1+ IMR - MMR)] - ( Additional Margin/ Position Quantity)

- Initial Margin Rate(IMR) = 1/Leverage
- Maintenance Margin Rate (MMR) depends on the risk limit level

*Example:

1. Long Position:

Trader A uses 50x leverage to open a long position of 1 BTC at a price of 20,000 USDT. Assuming no additional margin:

- Initial Margin Rate (IMR): (1/50) = 2%
- Maintenance Margin Rate (MMR): 0.5%
- Liquidation Price (LP): 20,000 USDT × (1 - 0.02 + 0.005) = 19,700 USDT

2. Short Position:

Trader B uses 50x leverage to open a short position of 1 BTC at a price of 20,000 USDT. Later, he manually adds 3,000 USDT in position margin. The new liquidation price after additional margin is calculated as follows:

- IMR: (1/50) = 2%
- MMR: 0.5%
- LP: [20,000 USDT × (1 + 0.02 - 0.005)] + (3000/1) = 23,300 USDT

3. Long Position with Deducted Funding Fee from Position Margin:

The trader uses 50x leverage to open a long position of 1 BTC at a price of 20,000 USDT. The initial liquidation price is 19,700 USDT (as shown in Example 1). However, the trader incurs a funding cost of 200 USDT, and the available balance is insufficient to cover it.

When the available balance is not enough to cover the funding cost, the cost is deducted from the position margin. As the position margin decreases, the new liquidation price approaches the mark price, making the position more susceptible to liquidation.

With the reduced position margin, the new liquidation price is calculated as follows:

- IMR: 2%
- MMR: 0.5%
- LP: [20,000 USDT × (1 - 0.02 + 0.005)] - (- 200/1) = 19,900 USDT

2. Isolated Mode:

Compared to the isolated mode, the liquidation price in cross mode may continuously change as the available balance is influenced by other trading pairs. In cross mode, the initial margin utilized by each position is independent of the account balance, but the remaining balance is shared among all positions. The available balance is affected by the unrealized profits and losses of all existing positions. Liquidation only occurs when the available balance reaches 0, and the maintenance margin is insufficient to sustain the positions.

*Example： 

1. Excluding Fees
In the cross-margin mode, assuming Trader A wants to open a long position with 100x leverage for 2 BTC at a price of 10,000 USDT. The current available balance is 2,000 USDT.

- Maintenance margin = MMR x Order value = 2 x 10,000 x 0.5% = 100 USDT

To calculate the maintenance (liquidation) price, we need to determine the current sustainable loss.

- Sustainable loss total = Available balance - Maintenance margin = 2,000 - 100 = 1,900 USDT

With a sustainable loss total of 1,900 USDT, the position can withstand a price drop of 950 USDT (1,900/2). Therefore, the liquidation price for the position is 9,050 USDT (10,000 - 950).

Trader A accepts this risk level and opens the position. The system will use 200 USDT from the available balance as the initial margin for the position.

- Initial margin = Position quantity x Entry price / Leverage = (2 x 10,000) / 100 = 200 USDT

- Available balance = 1,800 USDT

Example 2:

After some time, the price rises to 10,500 USDT, and Trader A's position unrealized profit is 1,000 USDT (500 × 2).

Sustainable loss total = Available balance + Initial margin - Maintenance margin + Unrealized profit = 1,800 + 200 - 100 + 1,000 = 2,900 USDT

With a sustainable loss total of 2,900 USDT, the position can withstand a price drop of 1,450 USDT (2,900/2). Therefore, the liquidation price for the position is 9,050 USDT (10,500 - 1,450).

Based on the above logic, we can deduce the formula for calculating the liquidation price as follows:

Calculation formula:

- For positions with unrealized profit:
LP (long) = Entry price - [(Available balance + Initial margin - Maintenance margin) / Net position quantity]
LP (short) = Entry price + [(Available balance + Initial margin - Maintenance margin) / Net position quantity]

- For positions with unrealized loss:
LP (long) = Current mark price - [(Available balance + Initial margin - Maintenance margin) / Net position quantity]
LP (short) = Current mark price + [(Available balance + Initial margin - Maintenance margin) / Net position quantity]

Note: Due to closing fees, the actual liquidation price may vary slightly.

Here is an example of calculating the liquidation price in the Cross-Margin mode (excluding transaction fees).

Example 1 (Full Hedging):

In the Cross-Margin mode, full hedging is possible only when holding the same quantity of the same contract. For instance, a trader holds a BTCUSDT long position with 1 BTC and a BTCUSDT short position with 1 BTC.

A fully hedged position will not be liquidated since the unrealized profit of one position will offset the unrealized loss of the other.

Example 2 (Partial Hedging):

Trader B holds the following two positions with 100x leverage, and the current available balance is 3,000 USDT. The current mark price is 9,500 USDT.

Long Position
Short Position

• Contract Quantity: 2 BTC
• Entry Price: 10,000 USDT
• Unrealized Loss: 1,000 USDT (calculated at the mark price)
• Contract Quantity: 1 BTC
• Entry Price: 9,500 USDT

A short position will never be liquidated because the long position's contract quantity is greater than the short position. When the price rises, the unrealized profit of the long position is always greater than the unrealized loss of the short position.

For the long position, when calculating the liquidation price, only the net risk exposure of the position needs to be considered: abs(Long Position - Short Position) = abs(2 BTC - 1 BTC) = 1 BTC.

Initial Margin = (1 × 10,000) / 100 = 100 USDT
Maintenance Margin = 1 × 10,000 × 0.5% = 50 USDT
Available Balance = 3,000 USDT

Liquidation Price (Long Position) = 9,500 - [(3,000 + 100 - 50) / 1] = 6,450 USDT

Note: In the isolated margin mode, unrealized losses will reduce the available balance. Unrealized profits do not impact the available balance because IBIT does not support using unrealized profits for opening positions or offsetting any unrealized losses in unhedged positions. Withdrawals cannot be made based on unrealized profits.

Example 3 (Position with different contracts):

- Trader C currently holds the following two positions with an available balance of 2,500 USDT:

Long Position
Short Position

Contract Name: BTCUSDT
Position Quantity: 1 BTC
Entry Price = 20,000 USDT
Leverage: 100x
Initial Margin (IM) = (1 × 20,000) / 100 = 200 USDT
Maintenance Margin (MM) = (1 × 20,000) × 0.5% = 100 USDT
Unrealized Loss = 500 USDT
Current Mark Price = 19,500 USDT
Contract Name: ETHUSDT
Position Quantity: 10 ETH
Entry Price: 2,000 USDT
Leverage: 50x
Initial Margin (IM) = (10 × 2,000) / 50 = 400 USDT
Maintenance Margin (MM) = (10 × 2,000) × 0.5% = 100 USDT
Unrealized Profit = 100 USDT

- For the BTCUSDT position,
Liquidation Price (LP) = 19,500 - [(2,500 + 200 - 100) / 1] = 16,900 USDT

- For the ETHUSDT position,
LP = 2,000 + [(2,500 + 400 - 100) / 10] = 2,280 USDT

- Assuming Trader C opens a new short position in BITUSDT, the position details are as follows:

Long Position
Short Position
Short Position (unchanged)

Contract Name: BTCUSDT
Position Quantity: 1 BTC
Entry Price = 20,000 USDT
Leverage: 100x
Initial Margin (IM) = (1 × 20,000) / 100 = 200 USDT
Maintenance Margin (MM) = (1 × 20,000) × 0.5% = 100 USDT
Unrealized Loss = 1,060 USDT
Current Mark Price = 19,000
Contract Name: BITUSDT
Position Quantity: 10,000 BIT
Entry Price = 0.6 USDT
Leverage: 25x
Initial Margin (IM) = (0.6 × 10,000) / 25 = 240 USDT
Maintenance Margin (MM) = (0.6 × 10,000) × 1% = 60 USDT
Contract Name: ETHUSDT
Position Quantity: 10 ETH
Entry Price: 2,000 USDT
Leverage: 50x
Initial Margin (IM) = (10 × 2,000) / 50 = 400
Maintenance Margin (MM) = (10 × 2,000) × 0.5% = 100 USDT
Unrealized Profit = 100 USDT

New Available Balance = 2,500 - 560 (additional unrealized loss from BTCUSDT long position) - 240 USDT (BITUSDT initial margin) = 1,700 USDT

The new liquidation price for each position will be calculated as follows:

For BTCUSDT long position,
LP = 19,000 - [(1,700 + 200 - 100) / 1] = 17,200 USDT

For BITUSDT position,
LP = 0.6 + [(1,700 + 240 - 60) / 10,000] = 0.788 USDT

For ETHUSDT position,
LP = 2,000 + [(1,700 + 400 - 100) / 10] = 2,200 USDT

The above examples illustrate that when multiple positions use the same asset (USDT) as collateral in cross-margin mode, as the unrealized loss of a losing position increases, the liquidation price of a profitable position moves closer to the mark price. This occurs because the shared available balance is used to offset the unrealized loss of the losing position, thereby decreasing the available balance. As described in Example 2, unrealized profits do not increase the available balance.

When the available balance is reduced to 0, the liquidation prices of the two positions will no longer change because, at that point, the positions are maintained by their initial margin, which is not shared between positions.

The only exception is when funding fees are deducted from the initial margin of the positions. This deduction occurs only when the available balance is 0, and any further deduction of funding fees will reduce the initial margin of the positions. In this case, the liquidation prices of the positions will be recalculated and gradually move closer to the mark price.

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