How to Identify the Key Factor Among Various Liquidation Indicators
“Dear users, due to the drastic market fluctuation, your XXX contract has been liquidated”, this is probably the least wanted message that a contract investor is expected to receive.
Because every trader knows, liquidation means the loss of the investment.
Superficially, it seems that the liquidation indicators for the Standard Contract, USDT Contract, and Delivery Contract are different. In essence, the key of these indicators is Maintenance Margin.
The only way to avoid dangerous things is to understand it. Which do you prefer? The frightened deer that cannot move when illuminated by the strong light from a car, or the smart “Jerry” in “Tom & Jerry” that can never be caught.
Liquidation Indicator for the Delivery Contract — Estimated Liquidation Price
In the delivery contract, whenever there is an open position, the system will give an estimated liquidation price. It is important to focus on whether the market price is close to the estimated liquidation price. Investors should adjust the investment strategy according to the market conditions.
If the position loss reaches the estimated liquidation price, it means that the account assets have been lower than the maintenance margin, and positions will be liquidated.
Liquidation Indicator for the Standard Contract — Liquidation Price
Whenever there is an open position in the Standard Contract, the system will calculate the liquidation price. If this price is triggered, indicating that the current account assets are lower than the maintenance margin, positions will be liquidated.
Compared with the delivery contract, the standard contract is a kind of perpetual contract. It uses the index price taken from the multiple top exchanges to calculate the liquidation price, which can avoid the influence by the price fluctuation of a single exchange, and thus avoid the liquidation caused by the market manipulation.
For example, 58COIN uses the weighted average of the market prices of Huobi Global and Binance. Therefore, the standard contract of 58COIN is not affected by the platform price, even if there is market manipulation, users of the standard contract will remain unaffected.
Liquidation Indicator for the USDT Contract — Position Risk
Compared with the use of the estimated liquidation price in the delivery contract and the standard contract, the USDT contract combines the risk of all open positions to a single value — position risk.
Under other contracts, if a position triggers the estimated liquidation price, then it will be liquidated directly. However, in the USDT contract, if the unrealized profit of a position is 200 USDT and the unrealized loss of another position is 50 USDT, then the total unrealized profit and loss of the account will be 150 USDT, which means the comprehensive position is in profit, and the position in loss is “temporarily” safe. Such a mechanism can reduce the risk of a position from being liquidated.
When the position risk reaches 100%, indicating that the current account assets are lower than the maintenance margin, positions in the contract will be liquidated. At 58COIN Exchange, users will be reminded by the platform when the risk reaches 90%, to facilitate the adjustment of investment strategies in time.
Similar to the Standard Contract, the USDT Contract uses the index price to calculate the risk level.
Different Indicators, The Same Core
Investors may open positions for various reasons, but there is only one reason for liquidation — the account assets are lower than the maintenance margin.
Whether being the estimated liquidation price of the delivery contract, or the liquidation price for the standard contract, or the position risk of the USDT contract, all are indicators of liquidation. When triggered, meaning the account assets (non-frozen part) are lowered than the maintenance margin.
The indicator is like the explosive, and the maintenance margin is the lead of the ignition. When it is burned out, the explosive will burst. After opening the position, investors should always pay attention to the “explosive” and adjust the strategy in time to avoid being liquidated.
Although digital contracts derive from futures, they’ve already developed different operational logic. The delivery contract is the “initial” models; the standard contract uses “index price” to reduce the risk of liquidation; the USDT contract uses the combination of “index price” and “comprehensive” position risk mechanism to strengthen the liquidation-proof capability.
The USDT contract has seen a significant improvement in the design model compared to the earlier delivery contract.