Below is an example of a hypothetical loan that you could take out using Arch to better understand how price movements result in margin calls or partial liquidations, and how to handle them.
Let’s assume the loan looks as follows:
Maximum starting Loan-To-Value (LTV): 60% (note this is always the same as the cure threshold)
Margin call LTV: 70%
Partial liquidation LTV: 80%
For this example, let’s say you want a loan of $60,000 against Bitcoin. With a starting LTV of 60%, you need to put up $100,000 worth of Bitcoin. This is calculated by dividing the loan amount by the starting LTV: $60,000 / 0.60 = $100,000.
If you opt for a lower starting LTV, say 50%, you would need to put up $120,000 in Bitcoin collateral, calculated as $60,000 / 0.50 = $120,000.
Now, what happens if the price of Bitcoin drops? Here's how to calculate at what price you’ll be margin called or partially liquidated, based on the following formulas:
Margin Call Price = (Starting LTV / Margin Call LTV) * Starting Price
Partial Liquidation Price = (Starting LTV / Partial Liquidation LTV) * Starting Price
Let’s assume the starting price of Bitcoin is $50,000.
Margin Call:
You’ll be margin-called if the price of Bitcoin drops below:
(0.60 / 0.70) * $50,000 = $42,857
At this point, you have 24 hours to bring your LTV back to the cure threshold (60%). If you get margin called, Arch will send an email alert specifying how much collateral you need to add and it will also be displayed on your loan dashboard. If you don't meet the margin call within the time period, partial liquidation may occur.
Partial Liquidation:
If Bitcoin’s price falls below:
(0.60 / 0.80) * $50,000 = $37,500
Arch will initiate a partial liquidation of your collateral to bring your LTV back to the cure threshold, which in this example is 60%. This partial liquidation occurs automatically to protect against further losses. Instead of liquidating the entire collateral, Arch will sell just enough to reduce your LTV to the safe 60% threshold.
For example, if Bitcoin drops below $37,500, Arch would sell a portion of your collateral to repay part of the loan such that the LTV is restored to 60%. A 2% fee is applied to the amount sold during the partial liquidation.
After the partial liquidation, your loan will continue, and you will still be responsible for making monthly interest payments, which will be reflective of the new reduced loan amount.
These thresholds will be displayed in two places, firstly, when you configure a loan you will see a screen detailing the exact prices at which any margin call or partial liquidations will occur.
Also, when you have an active loan, you will also have a panel detailing the prices at which any margin call or partial liquidation will occur. Note that the example below is for Solana.
