What is liquidation in crypto futures? A simple guide with examples
Liquidation is when an exchange closes your futures position by force. See how the liquidation price is worked out, with long and short examples, and how to lower your risk.
Liquidation is when an exchange closes your futures position by force, because your margin has fallen too low to cover more losses. It sounds scary, but it is easy to understand once you see the numbers.
This guide explains what liquidation is, how the liquidation price is worked out, and how to lower your risk. It uses simple examples you can check yourself.
What is liquidation in crypto futures?
When you open a futures position with leverage, you put down only part of the position's value. That deposit is your margin. Leverage lets you hold a position bigger than your margin.
If the price moves against you, your losses come out of that margin. When the margin left falls to a minimum level, the exchange closes the position for you. That forced close is a liquidation. It protects the exchange and other traders from a loss bigger than your deposit.
Initial margin and maintenance margin
Initial margin is what you pay to open the position. It is the position value divided by your leverage. A 6,000 USDT position at 10x needs 600 USDT.
Maintenance margin is the minimum you must keep in the position. It is a small percentage of the position value, set by the exchange for each market. When your margin falls to this level, liquidation starts.
Because the maintenance margin is above zero, you are liquidated a little before your initial margin is fully gone.
Long liquidation and short liquidation
Long position: you win when the price rises. You are liquidated if the price falls to your liquidation price.
Short position: you win when the price falls. You are liquidated if the price rises to your liquidation price.
When the market moves fast in one direction, many positions get liquidated at the same time. That is why you see news like "long liquidations" after a sudden drop.
Liquidation price examples
All examples below use Bitcoin at 60,000 USDT, a position of 0.1 BTC (6,000 USDT), and a maintenance margin rate of 0.5%. Real rates differ by exchange and market. Fees and funding are left out to keep the numbers clear.
For a long position with isolated margin, the liquidation price is:
(entry price × size − margin) ÷ (size × (1 − maintenance rate))
Example 1: a long at 10x
Margin: 6,000 ÷ 10 = 600 USDT.
Liquidation price: (6,000 − 600) ÷ (0.1 × 0.995) ≈ 54,271 USDT.
That is a fall of about 9.5%. Without the maintenance margin it would be exactly 10%, which is why "10x means a 10% move" is only a rough rule.
Example 2: the same trade at 2x, 10x and 50x
2x: margin 3,000 USDT, liquidation near 30,151 USDT. Bitcoin must fall about 50%.
10x: margin 600 USDT, liquidation near 54,271 USDT. A fall of about 9.5%.
50x: margin 120 USDT, liquidation near 59,095 USDT. A fall of only about 1.5%.
Higher leverage puts the liquidation price closer to your entry price. At 50x, a move of only 1.5% can close your position.
Example 3: a short at 10x
For a short, the formula is (entry price × size + margin) ÷ (size × (1 + maintenance rate)). With 600 USDT margin: (6,000 + 600) ÷ (0.1 × 1.005) ≈ 65,672 USDT. Bitcoin must rise about 9.5%.
Why the mark price matters
Most exchanges do not use the last traded price to decide a liquidation. They use a mark price, which mostly follows an index of prices from several big exchanges, smoothed over time. This stops one strange trade or a short spike on one exchange from closing your position.
This is why the chart can touch your liquidation price without closing your position. It also explains the reverse case: the mark price reached your level even though the last trade on the chart did not.
Isolated margin and cross margin
Isolated margin: each position has its own margin. If it is liquidated, you lose only the margin of that position.
Cross margin: all positions share the balance in your account. A losing position can use your free balance to stay open longer, but a liquidation can take much more of your balance.
What do you lose when you are liquidated?
With isolated margin, you can lose most or all of the margin in that position. Many exchanges also charge a liquidation fee, and the amount differs by exchange. Exchanges also keep an insurance fund, which covers the loss when a position cannot be closed before its margin runs out.
Notice in Example 1: at the liquidation price only about 27 USDT of the 600 USDT margin is left. After the closing trade, the fees and any liquidation fee, little or nothing comes back.
How to lower your liquidation risk
Use lower leverage. It moves your liquidation price further away. This is the most direct lever.
Set a stop-loss. A stop-loss tries to close the trade near a loss you chose, before liquidation and its fee.
Keep the position small. Risk only a small part of your balance on one trade.
Know your liquidation price before you trade, and check it again when the market moves fast.
Add margin if your exchange allows it. This also moves the liquidation price further away.
Practise liquidations without losing money
The fastest way to understand liquidation is to watch it happen to your own position, without real money at risk. Cryptathon is a free crypto futures simulator for Android. You trade Bitcoin, Ethereum and Solana perpetual futures with virtual money, on Cryptathon's own live order book (not a real exchange's).
Positions use isolated margin, so one trade can only lose its own margin.
Liquidation uses the mark price, and a liquidation fee of 0.5% of the closed value, up to the margin that is left, goes to an insurance fund, like on a real exchange.
After you open a position, the app shows its "Auto-closes at" price and a LIQ line on the chart, and shows how far the price is from that level, in percent.
Your balance is always virtual. Nothing can be withdrawn, and no real crypto is bought or sold.
New to all this? Start with what crypto paper trading is.
Sources
Frequently asked questions
What is a liquidation price?
It is the price at which the exchange closes your position by force. For a long it is below your entry price, for a short it is above. Higher leverage puts it closer to your entry price.
Can I lose more than my margin?
With isolated margin, normally no. Your loss is limited to the margin of that position, and the exchange's insurance fund covers a loss beyond it. With cross margin, a liquidation can use your other balance too.
Does a stop-loss stop liquidation?
A stop-loss placed before your liquidation price usually closes the trade first, with a smaller loss and no liquidation fee. In a very fast market the fill can be worse than your stop price, so lower leverage still helps most.
Why was I liquidated when the chart never reached my price?
Exchanges usually liquidate on the mark price, not the last traded price. The two can differ for a short time. Fees and funding payments can also change your margin and move the liquidation price a little.
This guide explains how futures work. It is not investment advice. Trading with leverage can lose you money quickly.