What is a Loan Margin Call & Liquidation?
Are you considering a Celsius crypto-backed loan? Here’s an explanation of loan margin calls & liquidation prices.
In order to get approved for a Celsius crypto-backed loan, users must choose the following options:
- Loan amount and type (fiat or crypto stablecoins)
- Annual Percentage Rate (APR) and Loan-to-Value (LTV)
- Term Length
In the final loan application screen, a Celsius user is given the following information before confirming:
- Estimated loan collateral
- Monthly interest and total interest (over term length)
- Total number of payments (over term length)
- Margin call price
- Liquidation price
Many Celsians ask about the difference between the Margin Call and Liquidation prices for their crypto-backed loans. There is oftentimes some confusion as to what they are and how they affect their loans when asset prices decline slightly or plummet during a sell-off. We’ll explain all of it in this article.
Loan Margin Call Price
The ‘Margin Call Price‘ is the margin level at which you are in danger of having some of your positions forcibly closed.
When it comes to your Celsius loan, the Margin Call price is the loan collateral price where you will be required to add additional loan collateral to meet the minimum loan-to-value (LTV) for your loan terms.
The Celsius Loans Team will do their best to contact the borrower regarding a margin call situation. However, it must be noted that it is the responsibility of the borrower to keep on top of their current LTV for active loans. It is NOT the responsibility of the Celsius Loans Team to contact the borrower.
For example: if you take out a stablecoin loan using Bitcoin (BTC) as the loan collateral, a snapshot of the BTC price is taken at the time of your loan approval to determine how much BTC is required for your loan. Depending on your APR/LTV option, if the BTC price declines to a certain price below the snapshot price, the borrower is required to ‘top-up’ their loan collateral (add BTC to their loan) to reduce their LTV -or- to close out their loan completely.
Loan Liquidation Price
The ‘Margin Liquidation Level‘ or ‘Loan Liquidation Price‘ is the margin level at which an automated liquidation process will occur.
When it comes to your Celsius loan, the Liquidation price is the loan collateral price where you are required to add additional loan collateral immediately to improve your loan-to-value (LTV). If the Margin Call is not met, Celsius will liquidate a portion of your loan collateral to cover the Margin Call.
The margin call requires you to add new funds to your margin account ASAP. If you do not meet the margin call, the Celsius Loans Team will close out any open positions in order to bring the account back up to the minimum value. This is known as a forced sale or liquidation.
For example: if you’ve already received a margin call but ignore it, and the price of BTC (as per above example) drops to the Liquidation Price specified during the loan application, then Celsius will liquidate a portion of your BTC in order to reduce the loan LTV to suitable levels.
Will Celsius Automatically Liquidate My Assets?
The Celsius Loans Team will make every effort to contact the borrower if a margin call occurs. They will call and/or email you to remind the borrower to add more loan collateral or to close out the loan by paying back the loan principal. The Team will give you time to sort things out too, but not too much time. Usually, they will NOT liquidate your assets without trying to contact you first!
However, if a Celsian in a margin call position ignores the Celsius Loans Team’s requests to add collateral, and the collateral price reaches the Liquidation Price, the team will proceed to liquidate a portion of your assets to cover the margin call. This is an industry standard and is not the best outcome for any party.