In short, margin call means that in leveraged trading, due to the sharp drop in asset value, investors not only lose their principal but also owe debts. Below, I will explain the concept of margin call in detail through specific examples.
First, let's look at a normal transaction. Suppose the price of a Bitcoin is $50,000, and you spend $50,000 to buy one Bitcoin. This is a normal transaction, with no leverage and no additional risk.
However, in leveraged trading, the situation is different. Take 10x leverage trading as an example. You still buy one Bitcoin, but this time you only need to pay 10% of the amount, which is $5,000. The remaining 90%, which is $45,000, is a loan provided to you by the trading platform. This means that you use leverage to magnify your investment.
Of course, this loan is not free. You need to pay back the $45,000 later. However, if the price of Bitcoin rises, your profit will be magnified accordingly. For example, if the price of Bitcoin rises to $55,000, after you sell Bitcoin, you can still make a net profit of $10,000 after deducting the loan. This is the profit magnification effect brought by leveraged trading.
However, leveraged trading also comes with greater risks. If the price of Bitcoin falls, your losses will also be magnified. For example, when the price of Bitcoin falls to $45,000, the value of the Bitcoin in your hands is only enough to repay the $45,000 you borrowed. Although Bitcoin has only fallen by 10%, with the effect of 10 times leverage, your $5,000 principal has been lost.
