What is forced settlement of Bitcoin? Meaning of forced settlement and how to prevent it.

Reasons for Forced Settlement

Why does the margin go to zero? This is related to another concept, leveraged trading.

Leverage trading, so to speak, is a system that allows you to invest several times the original amount with a small amount of funds. In other words, without leverage in investing, forced Settlement does not occur.

In simple terms, leveraging means that you have borrowed money from the exchange, which comes with risks.

Borrowed money serves as a fulcrum, amplifying profits and losses. It is akin to a physical lever, which is why we say "to leverage."

Leverage trading exists not only in cryptocurrencies but also in stocks and futures trading. The reason Bitcoin generates such high profits and losses is due to its high leverage of 125 times.

For example: If the price of Bitcoin is 50,000 and Mr. Small Fish uses 500 USD from his account with 100 times leverage, the value of the position will be 50,000.

When the price of Bitcoin rises by 1%, the value of the position becomes 50,500, resulting in a profit of 500. In simple terms, using 100x leverage means that just a 1% movement in price will double your funds.

Profit and risk always go hand in hand. Leverage can quickly increase profits while also accelerating the risk of losses.

If you take a long position with 100x leverage, a 1% increase in price will result in a 100% return, doubling your principal.

In the above example, it is forced settlement at a 100% loss, but in actual transactions, the calculation methods of each exchange vary slightly, and some calculate at 90%. In specific transactions, it is most accurate to refer to the liquidation price provided by the exchange.

If you leverage, you will definitely take on risk!!!

Forced Settlement means that assets will become zero

To Avoid the Risks of Forced Settlement

1. Avoid leverage trading

There are many reasons why forced settlement occurs, but it is mainly due to investors seeking excessive profits in a short period and having a leverage ratio that is too high. To avoid forced settlement, it is important to either avoid leverage trading and futures trading or choose the lowest possible leverage ratio to reduce investment risks.

2. Cut losses in a timely manner

In the event of a significant price drop, quickly cut your losses, avoid having an optimistic mindset, make firm decisions when it's time to decide, and promptly close your position.

3. Avoid frequent excessive trading

4. Pay attention to additional margin

After a forced Settlement occurs, you can deposit additional margin to ensure the normal operation of your account, but unconditionally adding more in hopes of a turnaround victory may lead to setbacks along the way and result in unbearable losses.

5. Do not blindly follow others' trades.

In any type of investment, blindly following others' trades without understanding the market and without your own judgment is the most avoidable thing. The investment market is unpredictable, and investors should ensure their own calm judgment.

There are two trading modes for perpetual futures

Cross Margin Mode / Isolated Margin Mode

Cross Margin Mode: In Cross Margin Mode, the investor's margin can be used to cover the profits and losses of all positions. This means that all assets in the user's account are used as margin for the positions. In this case, the timing of liquidation for the positions is delayed, but once liquidated, all assets will be lost.

Isolated Margin Mode: In isolated margin mode, each position has its own independent margin, making it suitable for investment methods that diversify risk. Even if a single position is liquidated, it does not affect other positions.

Important Notes

Forced settlement should be absolutely avoided. After a forced settlement on the exchange, a clearing fee is incurred, and this cost is very high.

In my experience, forced Settlement is really painful. Once, when the market plummeted, my leveraged position was wiped out in an instant, and I was charged even the liquidation fee. If I had kept my composure and cut my losses early, I could have minimized my losses significantly. Don't be swayed by the allure of leverage—it is a double-edged sword.