What is Margin Call and how to minimize the risk of its occurrence?


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 transferred to the lender in order to pay off the borrower's debt. This is because the collateral has fallen below the permissible level and is no longer deemed sufficient for the loan amount.

All loan applications on Biterest are already collateralized. Until the expiry date of the loan period, the collateral is securely stored on the multisig-address. However, the collateral value is not frozen and continues to increase and decrease following a BTC rate. If the the BTC rate increases by 10%, the collateral value also increases by 10%.

When does Margin Call occur? If the value of the collateral at the current exchange rate is equal to the value to be repaid, Margin Call occurs.

How to track the risk of Margin Call? Anyone can check how the collateral value of any application differs from its initial collateral value in column titled "Collateral ($)". The collateral value is displayed at the current exchange rate of BTC / USD and in terms of percentage change from the initial value. The "Repayment" column shows the amount, including accrued interest, which the borrower must repay to the lender in order to have their bitcoins returned. Margin Call occurs for active loan applications when the cost in these two columns is equal.

image

If you are a borrower or a lender, you can track the changes in the value of the collateral and the risk of Margin Calls on the loan application page. For each application, the necessary information is provided about: 1) current value of collateral; 2) percentage of change from the initial collateral value; 3) Margin Call collateral value; 4) predicted BTC rate when Margin Call will occur.

  • image

How to minimize Margin Call and how to calculate the collateral value when it occurs? Margin Call is influenced by the discount value and the bitcoin rate. The higher the discount is set by the borrower, the lower the risk of Margin Call is.

For example, on June 7th, 2018, the borrower applied for a loan of 2500 USD, for 30 days at 18% per annum. The amount to be returned to the lender would be 2537 USD (2500 + 2500 18% 30/365). Margin Call will happen when the current collateral value is reduced to the amount of the loan repayment. Let's consider whether Margin Call would occur during the loan period if the discount from the value of the collateral was established at: a) 35% b) 20%?

a) At a discount of 35%, the initial collateral value is 2537 / (100% -35%) = 4228 USD. As the BTC rate was $ 7,605.6, the pledge was 0.5559 BTC. Margin Call would occur if the BTC rate dropped to 4563.7 USD.

b) At a discount of 20%, the initial value of the collateral is 2537 / 0,8 = 3171 USD, and the pledge is 0,41693 BTC. Margin Call would occur if in the 30-day period the BTC rate dropped to 6084 USD.

image

As we see on the graph above, the minimum BTC rate for 30 days was 5880 USD. Therefore, at a discount of 35% Margin Call would not have happened, but would have occurred at 20%.

At what discount is the low risk of Margin Call? After a retrospective analysis of the bitcoin rate over the past two years, a chart was constructed of the maximum depreciation of BTC over a 30-day period.

image

Analyzing the graph below, we see that with a discount of 20% Margin Call could have occured 239 times in 2 years.

20

With a discount of 35% Margin Call would happen 37 times.

35

With a discount of 50% Margin Call would happen 11 times, but only for applications that were created between January 5 and January 15, 2018.

50

In conclusion, we suggest setting a discount of at least 35%, and preferably 50%.

In what situations does Margin Call not occur? Margin call only works for active applications. Therefore, if the market collateral value of the ungranted application dropped to the Margin Call rate, this application will become inaccessible for creditors and removed from the exchange. Margin Call does not occur in cases where the application is pending in arbitration (the borrower complained of fraud by the creditor) or within the first five days of money beings sent via Bank payment.