What is Margin Call
Margin Call can be thought of as a risk limit. It is a critical situation, in which the loan is forcibly stopped, and the collateral is used to pay off the user’s debt.
Why the loan is forced to finish
Until the end of the loan period, the collateral stored on the user’s account balance continues to increase and decrease following a BTC rate. If the the BTC rate decreases by 10%, the collateral value also decreases by 10%. Since the minimum collateral value is limited by the used loan limit, it cannot decline indefinitely.
When does Margin Call occur
If the value of the collateral at the current exchange rate is only 10% higher than the used loan limit, Margin Call occurs. In the other words, it happens when the LTV ratio exceeds 90%. A decline of the Bitcoin exchange rate leads to a decrease in the balance level too but to an increase in the LTV ratio.
The higher the LTV is, the higher the risk of the Margin Call is. LTV increases in three cases:
1) upon obtaining a loan;
2) upon withdrawing bitcoin from the account balance;
3) when Bitcoin’s price decreases.
Consider an example:
Used loan limit: 840 USD;
Current account balance: 1000 USD;
Current LTV (loan-to-value): $ 840 / $ 1000 * 100% = 84%
Margin Call occurs at the balance value: $ 840 + 10% = $ 924
Margin Call occurs at the LTV: $ 840 / $ 924 > 90%
How to prevent the Margin Call
In order to prevent the Margin Call occurrence, it’s needed to lower the LTV. This can be done by adding additional collateral to the account balance or by partial pay off of the loan. It is recommended to keep LTV at 50% to protect yourself from the risk of a sharp decline in the price of Bitcoin.
By default, as soon as the LTV exceeds 80%, the user starts to receive notifications by email about a high risk of a Margin Call. Reminders will be sent every 3 hours. On the “Notifications” page, you can manage the settings to decrease or increase the LTV level at which you want to receive the first Margin Call reminder and the frequency of the notifications.
Biterest has the highest initial LTV — 83%.
Unlike other crypto lending platforms, where Margin Call occurs when LTV increases to 80%, on Biterest it only happens when LTV exceeds 90%.