What is margin (deposit) used for?

What is margin used for?

Margin is a deposit you put up when you open a position. Depending on the leverage you choose, this deposit represents a fraction of the amount you use to open and close positions. Before you begin trading on margin (with leverage), you will have to put up a certain amount as collateral (0.1 BTC as a minimum), which may then be increased or lowered as required.

Using margin to open a position

Let’s assume that you are opening a long position for PLN 1000 at PLN 2000 per bitcoin. This means that the value of the position is 0.5 BTC. If you trade with a leverage of 1:4, you need to put up 0.5 BTC/4 = 0.125 BTC as margin.

If your margin account balance is lower, you will not be able to open a position. If have a sufficient amount of margin, the sum of 0.125 BTC will be blocked for as long as your position remains open. You cannot use the same amount to open another position. These funds will remain blocked until you close the position.

Margin when the value of a position falls

Margin is meant to ensure that despite unfavourable price movements, you will still be able to pay back the funds you borrowed to open a position. Thanks to this arrangement, any shortfall there is when you close your position will be deducted from your margin.

Let’s assume that you have 0.2 BTC as margin and you are opening a long position for PLN 1000 at PLN 2000 per bitcoin with a leverage of 1:4. This means that out of the margin of 0.2 BTC 0.125 BTC is blocked when the position is opened and 0.075 BTC remains available. You can withdraw this amount, use it to open other positions or leave it as additional collateral for the open position.

If you choose to leave this amount as additional collateral, your position may be kept open as long as the price of bitcoin does not drop below PLN 1428.5714. This value is calculated by dividing PLN 1000 (which you borrowed from us when you opened a position and which you have to pay back when you close it) by the total amount of funds you have, i.e. 0.7 BTC (0.5 BTC you bought for PLN 1000 you borrowed from us and 0.2 BTC of additional collateral you have). As long as the price does not drop below this value, the amount you put up as collateral will be sufficient to recover the funds you borrowed from us. However, if the price fell below this value, it would not be possible to cover the losses using this margin. Such a situation is unacceptable and measures are put in place, as described below, to prevent it from happening.

Margin secures all open positions at once. This means that if some of your positions are trading at a loss and at the same time other positions are trading at a profit, they balance each other out. What matters is the combined performance of all your positions – if on balance you positions are trading at a loss, the margin must be sufficient to cover it.

Margin call

When the value of your positions falls, you will receive a margin call. This is an e-mail telling you that the value of your positions fell to a dangerously low level and that margin may soon run out and will not be sufficient to cover losses.

A margin call is sent whenever the total value of your positions falls below 20% of the current amount of margin, in other words in a situation where closing all the positions would result in at least 80% of the margin being used to cover losses.

In the above example, a margin call will be sent to you, if the price of bitcoin drops to PLN 1515.1515. This value is calculated as follows:

  • You have the margin of 0.2 BTC; 20% of this amount is 0.04 BTC.
  • In order to close your position so that you are left with 0.04 BTC, you have to sell 0.66 BTC (0.5 BTC you bought for PLN 1000 which you borrowed from us when you opened the position plus 0.16 BTC out of your margin).
  • In order to recover PLN 1000 you borrowed from us, you have to sell 0.66 BTC at a price of at least PLN 1000/0.66 BTC = PLN 1515.1515.

By depositing additional funds to top up margin, you can extend the range of price movements you will be able to absorb to keep your positions open. Of course, you can do it at any time rather than wait for a margin call. A margin call is simply a signal for those who do not monitor the value of their positions on an ongoing basis.

Automatic closure of positions

If the margin is not replenished and the value of all your positions falls below 5% of the margin, all the open positions will be automatically closed. This is to prevent a situation where the margin is insufficient to cover losses.

In the above example, your position will be closed, when the price of bitcoin drops below PLN 1449.2754. At this price level, when the position is closed, you will still have 0.01 BTC in your account (or 5% of the initial margin), while the remaining 0.69 BTC will be sold to recover the sum of PLN 1000 you borrowed from us when you opened your position.

Margin management

You may increase or decrease the amount of margin at any time by transferring funds from/to your BTC balance. The following restrictions apply in this regard:

  • The amount of margin may never be lower than 0.1 BTC.
  • The amount you deposit into or withdraw from your margin account may not be lower than 0.01 BTC.
  • You cannot withdraw the amount of margin which was blocked when you opened a position. To release this amount, you must first close relevant positions.
  • If your positions are trading at a loss, you cannot withdraw a sum which would cause the value of positions to drop below 10% of the margin
Podziel się wpisem

Leave a Reply

Your email address will not be published.