What Is Liquidation in Crypto? How Liquidation Price Works
Liquidation is when an exchange force-closes a leveraged position because margin no longer covers losses. Learn how liquidation price works and how to avoid it.
Updated
Liquidation is the forced closing of a leveraged trading position by an exchange when the trader's margin falls below the required maintenance level. It happens when the market moves against a position far enough that the remaining collateral can no longer safely cover further losses.
Key takeaways
- Liquidation only affects leveraged positions, such as margin trades or perpetual futures.
- It is triggered when your margin drops below the maintenance margin.
- Exchanges use the mark price, not the last traded price, to decide when to liquidate.
- Higher leverage puts the liquidation price closer to your entry.
- Funding payments and fees reduce margin over time and can bring liquidation closer.
How liquidation works
When you open a leveraged position, you post initial margin. At 10x leverage, a $10,000 position needs $1,000 of margin. The exchange also sets a maintenance margin, a minimum amount of margin that must remain, for example 0.5% of the position size.
If losses shrink your margin below the maintenance margin, the liquidation engine takes over the position and closes it in the market.
Liquidation price formula
A simplified formula for isolated margin positions, ignoring fees:
- Long: liquidation price ≈ entry × (1 − 1/leverage + maintenance margin rate)
- Short: liquidation price ≈ entry × (1 + 1/leverage − maintenance margin rate)
Example: you open a 10x long on a coin at $100 with a 0.5% maintenance margin rate.
Liquidation price ≈ 100 × (1 − 0.10 + 0.005) = $90.50
| Leverage | Approx. move to liquidation (long, 0.5% MMR) |
|---|---|
| 2x | −49.5% |
| 5x | −19.5% |
| 10x | −9.5% |
| 25x | −3.5% |
| 50x | −1.5% |
Real exchanges add trading fees, funding and tiered maintenance rates that rise with position size, so always check the liquidation price the exchange shows you.
Isolated vs cross margin
| Isolated margin | Cross margin | |
|---|---|---|
| Collateral at risk | Only the margin assigned to that position | Your whole account balance |
| Liquidation | One position at a time | Account-wide, when total margin is insufficient |
| Best for | Limiting the loss of a single trade | Hedged or multi-leg strategies |
What happens after liquidation?
- The position is closed by the liquidation engine.
- A liquidation fee may be charged and paid into the exchange's insurance fund.
- If the market moves too fast and the loss exceeds your margin, the insurance fund covers the difference. If it is not enough, some exchanges use auto-deleveraging (ADL), which reduces profitable positions on the other side.
Liquidation cascades
When many leveraged positions share similar liquidation prices, one liquidation can push the price further, triggering the next. These liquidation cascades cause the sharp wicks often seen in crypto charts, and they usually come with extreme funding rates as one side of the market becomes crowded.
How to reduce liquidation risk
- Use lower leverage and keep extra margin in the position.
- Set a stop-loss above your liquidation price.
- Use isolated margin for speculative trades.
- Watch funding costs on positions you hold for days.
- In delta-neutral strategies such as funding rate arbitrage, each leg can still be liquidated on its own exchange, so keep both sides well collateralized.
Frequently asked questions
- What does liquidation mean in crypto?
- Liquidation means the exchange automatically closes your leveraged position because your margin has fallen below the maintenance margin requirement. You lose most or all of the margin allocated to that position.
- How is liquidation price calculated?
- For an isolated long position, a simplified formula is: liquidation price ≈ entry price × (1 − 1/leverage + maintenance margin rate). For a short: entry price × (1 + 1/leverage − maintenance margin rate). Exchanges also include fees, funding and tiered margin rates.
- Does higher leverage mean faster liquidation?
- Yes. At 10x leverage a roughly 10% move against you wipes out your margin, while at 50x a move of about 2% is enough, and liquidation happens slightly before that because of the maintenance margin.
- Can funding rates cause liquidation?
- Yes. Funding payments are deducted from or added to your margin. Paying a high funding rate over a long period reduces your margin and moves your liquidation price closer to the market price.