Margin Call

A margin call in crypto occurs when the value of assets held as collateral for a margin trading position falls below a certain threshold. This prompts the lender or exchange to request additional funds to cover potential losses or to liquidate the position to mitigate risk.

For example, let's say you borrow $10,000 worth of Bitcoin to trade on margin, using $5,000 of your own funds as collateral. If the value of the Bitcoin drops significantly, your collateral may no longer be enough to cover the borrowed amount. At this point, you may receive a margin call requiring you to deposit more funds to maintain the required collateral level. If you fail to do so, the lender or exchange may liquidate your position to recover the borrowed funds.

In cases where there's extreme market volatility or sharp price declines, margin calls can occur suddenly, leading to substantial losses for traders who are unable to meet the call. For instance, during a flash crash in the crypto market, the value of assets can plummet rapidly, triggering a cascade of margin calls and liquidations. This happened in the crypto market crash of March 2020, where Bitcoin's price dropped by over 50% in a single day, causing widespread margin calls and liquidations across exchanges.