What is liquidation in crypto?
Liquidation in crypto is the forced closing of a leveraged position by the exchange when your losses have used up almost all of the margin backing it. It happens automatically once the market price reaches your liquidation price, and you usually lose most or all of the margin you put into that trade.
Liquidation only affects traders who use borrowed funds, through margin trading, futures or crypto loans. If you simply buy bitcoin with euros, nobody can liquidate you. Leverage magnifies losses as well as gains, and most retail traders who trade with leverage lose money.
What is liquidation in crypto trading?
In crypto trading, liquidation means the exchange closes your leveraged position for you because your margin no longer covers the risk. The exchange is protecting its loan: once your equity drops to the maintenance margin level, the position is sold (for a long) or bought back (for a short) at the market price.
The word also has an everyday meaning. Liquidating your crypto can simply mean selling it for euros, which is your own choice. A forced liquidation is not: it is triggered by the exchange’s liquidation engine, often within seconds, with no option to wait for the crypto market to recover.
How crypto liquidation works
Crypto liquidation follows the same sequence on almost every exchange; fee levels and margin ratios are in each platform’s margin requirements.
- A trader opens a leveraged position. For example, €1,000 of your own money at 10x controls a €10,000 position.
- The exchange sets a maintenance margin. This is the minimum equity you must keep, usually a small percentage of the position size.
- The market price moves against you. Losses come straight out of your margin balance.
- The trader’s margin falls to the maintenance level. The position reaches its liquidation price, usually measured on the mark price.
- The liquidation engine closes the position automatically. It trades at the market price, which in fast markets can be worse than your liquidation price.
- Fees are charged. Most exchanges charge liquidation fees, and some pay them into an insurance fund that covers losses when a position closes below zero.
Liquidation price and maintenance margin
The liquidation price is the price at which your position is forcibly closed. For a leveraged long position the liquidation price sits below your entry price; for a short position it sits above, and the higher your leverage, the closer it is.
Maintenance margin moves the liquidation price a little closer than your margin alone suggests. The exchange doesn’t wait until your margin is exactly zero: it closes the position while some equity is left to pay fees and absorb slippage.
How to estimate your liquidation price
A quick estimate for a long position: you are liquidated when the price has fallen by roughly 1 divided by your leverage, minus a little for maintenance margin and fees.
Example: you put €1,000 of margin into a 10x long on bitcoin at €100,000. Your position is €10,000, or 0.1 BTC.
- A 10% fall to €90,000 would lose €1,000, your entire margin.
- With a maintenance margin of 0.5% of the position, the exchange steps in earlier, at about €90,450.
- Fees and funding payments taken from your margin can push the liquidation price higher still.
| Leverage | Approximate fall that triggers liquidation (long) |
|---|---|
| 2x | about 50% |
| 5x | about 20% |
| 10x | about 10% |
| 20x | about 5% |
| 50x | about 2% |
| 100x | about 1% |
These figures ignore maintenance margin and fees, so real liquidation comes slightly sooner. Always check the liquidation price the exchange shows before you open the trade.
Mark price vs last traded price
Most crypto exchanges trigger liquidation on the mark price, not the last traded price. The mark price is a fair-value price built from an index of prices on several trading venues, so a single large order or a brief spike on one exchange doesn’t wipe out leveraged traders.
The last traded price is the most recent trade on that exchange’s order book, and it can overshoot in volatile market conditions. The mark price reduces unfair liquidations, but when the whole market moves, the mark price follows and positions close quickly, sometimes with slippage.
Isolated margin vs cross margin
Your margin mode decides how much money a liquidation can take. With isolated margin, only the margin allocated to that position is at risk; with cross margin, the exchange can use your entire account balance to keep losing positions open.
- Isolated margin: liquidation comes sooner, but your maximum loss is the margin assigned to that trade.
- Cross margin: liquidation comes later because more collateral backs the trade, but when it happens you can lose the entire account, and one losing position can drag down multiple positions.
Beginners should use isolated margin. Our page on margin trading explains both modes.
How leverage increases liquidation risk
Leverage increases liquidation risk because it shrinks the distance between your entry price and your liquidation price. With high leverage, even small price movements that count as normal volatility in crypto are enough to close you out.
A 5% daily move in bitcoin is not unusual, and smaller coins move far more. At 20x, that ordinary move liquidates you. On perpetual futures contracts, funding rates also eat into your margin over time. See how leverage multiplies results both ways.
How to avoid liquidation
You avoid liquidation by keeping your liquidation price far from where the market is likely to go, and by leaving the trade yourself before the exchange does it for you.
- Use lower leverage. 2x or 3x gives a position room to survive normal swings.
- Set a stop-loss before the liquidation level. A stop-loss gets you out with a smaller, planned loss and no liquidation fee, though fast markets can fill it at a worse price.
- Size each position around an acceptable loss. Decide the euro loss you accept and work back to the position size.
- Check the liquidation price before entry. If it sits within a normal day’s range, the trade is too big.
- Monitor your margin ratio. Set price alerts and check open positions daily.
- Be careful about adding margin. Topping up moves the liquidation price away, but it also puts more money into a losing position.
- Watch the calendar. Central bank decisions and other big news can cause sharp price moves.
Why liquidation cascades happen
A liquidation cascade is a chain reaction: forced liquidations push the price down, which triggers more liquidations, which push the price down further. Many leveraged traders pick similar leverage and entry levels, so liquidation levels tend to cluster around the same prices.
In a sell-off, every liquidated leveraged long position adds a sell order and deepens the fall. In a sharp rally, shorts are bought back and push prices up in a short squeeze. Cascades help explain why the cryptocurrency market sometimes moves further and faster than the news alone would.
Liquidation in crypto lending and DeFi
Liquidation also happens when you borrow against crypto. If you deposit ether as collateral for a stablecoin loan on a DeFi protocol and the ether price falls, the smart contract lets outside liquidators repay part of your loan and take your collateral at a discount.
The trigger is a collateral ratio checked against a price feed called an oracle, so a faulty oracle or a smart contract bug can cause liquidations too. There is no regulator to appeal to, so read the protocol’s liquidation mechanism before you borrow.
What happens after a liquidation in the EU?
After a liquidation the position is closed, your margin is gone or mostly gone, and a liquidation fee may be deducted. Large exchanges usually cover any shortfall from an insurance fund, so you don’t end up owing money, but check the terms. Keep records: depending on your country, a liquidation can count as a realised loss for tax.
For EU residents, where you trade matters. Bitvavo, a MiCA-licensed exchange, offers margin trading up to 10x and charges a 2% liquidation fee, and Bybit EU feeds its spot-margin insurance fund with a 2% liquidation fee. Crypto derivatives fall under MiFID II rather than MiCA, and EU brokers selling CFDs must close out retail positions when the account falls to 50% of the required margin and offer negative balance protection. They also publish their loss rates: between 55% and 78.5% of retail CFD accounts lose money at the brokers we track. Unlicensed offshore exchanges offering 100x leverage give you none of this protection.
The bottom line
Liquidation is what happens when leverage meets a market move you can’t absorb: the exchange closes your trade and you lose most or all of your margin. Know your liquidation price before you enter, use lower leverage and isolated margin, set a stop-loss well before the liquidation level, and only trade on platforms licensed where you live.
Questions people ask
Can my bitcoin be liquidated?
Only if it is used as collateral for borrowed money, such as a margin position, a futures trade or a crypto loan. Bitcoin you bought outright on the spot market or hold in your own wallet can fall in value, but it can't be liquidated.
Do you owe money if crypto goes down?
Not if you bought with your own money: the most you can lose is what you paid. With leverage you can lose your whole margin, and in rare cases more, although large exchanges usually cover shortfalls from an insurance fund.
Does liquidation always lose all your margin?
Not always. Because the exchange closes the position at the maintenance margin level, a little equity may remain, but liquidation fees and slippage often take most or all of it.
How do I liquidate my crypto for cash?
If you mean selling, place a sell order for euros on your exchange and withdraw to your bank by SEPA transfer. That is a voluntary sale, not a forced liquidation, and it may have tax consequences depending on your country.