08 Jul, 2025
2 minutes
For crypto trading, the word "liquidation" will normally be seen when there is unwarranted volatility in the market. But what exactly is crypto liquidation, and why on earth would traders be so keen on it? In plain terms, liquidation refers to the compelled closure of a trader's margin position by an exchange due to the inability of the trader to meet the margin requirement. This normally occurs when the market unexpectedly moves against a trader so that he does not have enough collateral to maintain it.
Crypto markets are known for being risky, volatile, and fast. Leverage allows a trader to risk more capital towards price movement, but the liquidation risk is also increased. It is necessary for new and veteran traders who would wish to protect their capitals and ensure that losses are not experienced so painfully.
In this article, we'll walk through the key concepts behind liquidation in the crypto market, explain how liquidation prices are calculated, explore common causes and consequences, and offer practical tips for risk management. You'll also learn how liquidity differs from liquidation and how to minimize your chances of being liquidated on popular trading platforms.
Before starting any trading activity, on crypto or forex markets it's crucial to understand what is liquidation in crypto. Crypto liquidation is when an exchange closes a trader's position by force because the trader is unable to cover losses on a leveraged position. Forced closure is when the market price reaches a predetermined price, the liquidation price.
Liquidation usually happens in margin and futures trading because customers make use of borrowed funds to take positions greater than their own funds would allow. While leverage significantly boosts potential returns, it does come with the risk of losing the entire margin - and quite possibly additional funds - if the investor is dealing with a market contrary to his.
A long or short position is initiated using borrowed funds by a buyer.
Whenever the market is against them, the margin (or the account balance) decreases.
The moment that the margin level falls below the exchange's maintenance margin, the position is automatically liquidated to prevent further loss.
The reason for liquidation is to pay off the debt of the trader and to prevent the exchange from being left with economic loss due to a negative balance of a trader.
Now we can demystify what is liquidation in crypto trading. Liquidation price in crypto trading is the precise market price where an exchange closes a trader's leveraged position by force in order not to incur further loss. It is the breaking point - market value of the crypto asset reaches this point, the position is closed by force.
It depends on specific conditions:
Position entry price
Level of leverage used
Initial margin and maintenance margin requirement
Funding rates and trading commissions (for perps)
Suppose you purchase Ethereum (ETH) long at 10x leverage at $2,000. Your liquidation point may be near $1,800 according to the platform's unique rules. If ETH drops to that level, your position will be liquidated and your margin funds (collateral) will be forfeited.
Be aware that the greater leverage places your liquidation point near your entry point with a greater likelihood of forced liquidation - even on very small price movements.
Liquidation of crypto can happen for various reasons, typically poor risk management or exceptionally high market movements. Among the key reasons are:
Applying excessive leverage amplifies both profits and losses. With 20x or 50x leverage, a 2-5% move against your trading position will lead to liquidation.
Crypto markets are characterized by sudden and unexpected shifts. A flash crash or a movement from events can result in significant liquidations within minutes.
Your account is at risk if it lacks sufficient collateral to cover your existing position. A small adverse movement will erode your margin and trigger liquidation.
In fast markets, unmanaged traders or those who don't utilize stop-loss orders are most exposed. Algo traders and automated trading bots can quickly move prices, leaving oblivious retail traders behind.
Excessively high or low funding rates in perpetual futures can incent traders to over-hedge or hold risky positions, increasing the chances of liquidation in times of high volatility.
Crypto markets have witnessed numerous mass liquidation events throughout the years - usually in the form of catastrophic market drops or surprise macroeconomic news.
March 12, 2020 (Black Thursday): Bitcoin's value dropped over 40% within a day due to COVID-19 panic and led to crypto liquidations of over $1 billion on large exchanges.
May 19, 2021: The moment the news was released that China was tightening its grip on crypto mining, Bitcoin and altcoins tanked and carried out $8.6 billion of liquidations within 24 hours.
June 2022: The collapses of crypto lending companies like Celsius and hedge funds like Three Arrows Capital brought about a cascade of liquidations as they, together with traders, sought to de-risk.
These examples illustrate how rapidly leveraged positions are eliminated - and why liquidation risk should be understood.
Risk management through prudence is called for if one wants to avoid liquidation, particularly when trading with leverage. The following methods are imperative to minimize your exposure to forced liquidations:
Lower leverage trading provides you with more of a safety cushion. Yes, 50x or 100x leverage may be tempting, but it significantly shrinks your liquidation buffer. Sticking to 2x-5x leverage puts some room for maneuver.
Monitor your margin level closely. A health ratio or margin ratio indicator is usually available on most platforms - if it falls below a certain point, close your position or fund to keep it well above liquidation level.
A stop-loss closes your position automatically at a predetermined price level. This restricts losses prior to the market reaching your liquidation price and serves as an essential defensive mechanism in volatile markets.
During turbulent market times, even good positions will get caught up in short-run whipsaws. It is advisable to trade smaller size or stay away from over-exposure during crucial news releases and volatile trading sessions.
Margined separately guarantees that only the margin for a specified position is at stake, and therefore your whole account balance is not wasted. Cross margin allocates collateral to positions - which leads to snowballing liquidations when a losing trade occurs.
Crypto is a live market. Refrain from giving up positions. There is a need to keep an eye on your trades, market trends, and funding rates at all times in order to act before liquidation happens to you.
Although they practically sound the same when asking what is liquidation in crypto market, liquidation and liquidity are completely different words in crypto trading:
Liquidation is mandatory winding up of a position due to insufficient collateral. Liquidation is a step taken by exchanges to protect them from insolvency when losses of a trader are equal to or more than his collateral.
Liquidity is how fast an asset can be sold or bought in the market without affecting its price. It is ideal with numerous buyers and sellers, which results in thin spreads and fast execution of trades. Low liquidity causes slippage and price gaps.
High liquidity facilitates smooth entry/exit of trades.
Liquidation is due to poor risk management or over-leveraging.
But even if you find out what is liquidation price in crypto, there is still a chance that it could happen. When liquidation happens, this is what typically happens:
Your position is automatically closed. The exchange force-closes your position in order to liquidate the losses. This typically happens through a partial or full market order.
You lose your margin. The margin (collateral) you had to make the trade lost partly or totally. In extreme cases, especially where leverage is high and liquidity is low, your losses may be total.
You can lose more through fees. There are some sites with liquidation fees or penalties, which reduce your balance further.
Risk of account wipeout. If you had cross margin or multiple leveraged positions simultaneously, then one of the liquidations can trigger the others, thus triggering a domino effect and shutting down your account.
Emotional impact potential. Apart from the financial loss, liquidation is embarrassing. Most traders make foolish trades after liquidation, trading out of revenge or chasing losses - both typically leading to more errors.
Yes, liquidation is a natural occurrence in the cryptocurrency space - especially if there has been abnormal high volatility or abrupt price action. The reason being is the existence of leverage on large exchanges and the inherent volatility of crypto assets.
There are several reasons why liquidation is a natural occurrence:
High leverage use: Trading platforms will typically permit the opening of accounts with leverage up to 100x. This is for maximum profits but significantly narrows the liquidation point.
Price swings: Traditional markets rarely see double-digit percentage swings over the course of hours. Such volatility undercuts even well-hatched trades with their liquidation.
Low liquidity in altcoins: Ticker coins with less advanced order books usually have enormous price gaps, contributing to higher leveraged-position traders' liquidation risk.
Liquidation cascades: In the process of a huge liquidation, it leads to subsequent selling, thus creating an avalanche effect. The feedback loop converts the downward pressure into a powerful snowball that liquidates multiple traders in aggregate.
Massive liquidation events are also on a daily basis in the news - in market meltdown, billions of dollars' worth of leveraged positions are liquidated within hours. In the 2022 Luna crash or Bitcoin flash crash events, for example, liquidation sizes were record-breaking.
Liquidation is most likely the most critical risk to understand when trading crypto. Just as leverage magnifies profit, so does it also exaggerate traders to quite real loss of their collateral if price moves against them.
In a bid to keep this risk under control, traders should:
Understand how liquidation operates
Cautiously choose levels of leverage
Use tools like stop-losses and isolated margin
Constantly monitor their positions
Not trade if emotional or on high-impact news announcements
By developing good risk management habits and using leverage in a measured way, you will be able to keep your capital and trade better. The crypto market always has chances - but protecting your downside is how you make it into the game long enough to take advantage.
Liquidation in cryptocurrency trading is when the trader's position has been closed involuntarily by the exchange because margin collateral has fallen below the minimum level. It tends to cause the loss of funds that were invested in opening the position.
Crypto liquidity is employed to explain how quickly an asset can be sold or purchased without greatly affecting its cost. Good liquidity will have little slippage and smooth trades, while poor liquidity will have volatile prices and wide spreads.
When you get liquidated, your leveraged position is closed out involuntarily to prevent further loss. Your margin is lost, may incur a fee, and could even lose your entire balance if you're on cross margin or for multiple positions.
