Liquidations

8.1 The email nobody wants

Node opened an email from an exchange: "Your position has been liquidated." The position had been opened with 20x leverage. Bitcoin had dipped about 5% in an hour, and then recovered completely by morning.

"The price came right back," said Node. "But my position is gone, and so is my margin."

"Liquidation is permanent," said Hash. "The market doesn't give it back when the price recovers. That's why understanding exactly how and where it happens is the most important practical skill in perp trading."

8.2 What liquidation is

A liquidation happens when a position's margin, after unrealised losses, falls to the maintenance margin level (Chapter 4). The exchange then forcibly closes the position to stop losses from exceeding the trader's collateral.

Liquidation protects the exchange and the other side of the trade. Remember that every long has a matching short (Chapter 1). If a losing trader's losses exceeded their margin, someone would have to cover the difference. Liquidation is designed to close positions before that happens.

8.3 Calculating the liquidation price

For a linear perp with isolated margin, a simplified approximation is:

Long liquidation price ≈ entry price × (1 − 1 ÷ leverage + maintenance margin rate)

Short liquidation price ≈ entry price × (1 + 1 ÷ leverage − maintenance margin rate)

For an entry at $100,000 with a 0.5% maintenance margin rate, ignoring fees:

Leverage	Long liquidation price	Short liquidation price	Adverse move to liquidation
2x	$50,500	$149,500	49.5%
5x	$80,500	$119,500	19.5%
10x	$90,500	$109,500	9.5%
20x	$95,500	$104,500	4.5%
50x	$98,500	$101,500	1.5%
100x	$99,500	$100,500	0.5%

Node's 20x long needed only a 4.5% drop to be liquidated. A 5% dip did it.

Real liquidation prices differ slightly because of trading fees, funding paid, tiered maintenance margin, and each exchange's exact formula. Exchanges show your liquidation price when you open a position. Always check it.

8.4 What happens during liquidation

When the mark price (Chapter 6) reaches your liquidation price:

1. The exchange's liquidation engine takes over your position.
2. It closes the position by placing orders in the market, often as market orders.
3. A liquidation fee may be charged.
4. Any margin left after closing usually goes to the exchange's insurance fund, rather than back to you, on many exchanges.

There's also a second important price: the bankruptcy price, where your margin would be exactly zero. For a 10x long from $100,000, the bankruptcy price is $90,000. The liquidation price, $90,500, sits slightly above it, giving the engine room to close the position before losses exceed the margin.

8.5 The insurance fund

Sometimes the liquidation engine can't close a position at a good price, especially during fast moves with thin order books.

Mint's example. A 0.1 BTC long at $100,000 with 10x leverage, $1,000 margin.

Scenario	Engine closes at	Loss on position	Margin left	Who covers the difference?
Orderly market	$90,300	$970	$30	Remaining $30 usually goes to the insurance fund
Fast crash	$89,800	$1,020	−$20	Insurance fund covers the $20 shortfall

The insurance fund is a pool, built up mainly from leftover margin of past liquidations, used to cover cases where a liquidated position loses more than its margin. It protects winning traders from not getting paid.

8.6 Auto-deleveraging

In extreme conditions, the insurance fund may not be enough. Then many exchanges use auto-deleveraging (ADL): they automatically reduce or close the positions of profitable traders on the other side, often prioritising those with the highest profit and leverage, to cover the losses.

	What it means for you
You're on the losing side	Your position is liquidated as usual
You're on the winning side	Your profitable position may be partly or fully closed early, at the bankruptcy price of the liquidated trader

ADL is uncommon in normal conditions, but it does happen during extreme volatility: several venues triggered it during the October 2025 liquidation cascade (Module 16, Chapter 10). It's a reminder that even winning positions on a derivatives exchange carry counterparty and system risk. Exchanges usually show an ADL indicator for each position.

8.7 Partial liquidations

For larger positions, many exchanges liquidate gradually. Instead of closing the whole position at once, they reduce it step by step, lowering its maintenance margin requirement, which may save the rest. Smaller positions are usually closed fully.

8.8 Liquidation cascades

Individual liquidations can trigger chain reactions.

1. Price falls, reaching a cluster of long liquidation prices.
2. The liquidation engine sells to close those longs.
3. That selling pushes price lower.
4. Lower prices reach the next cluster of liquidation prices.
5. More forced selling follows.

Step	Price	Event
1	$100,000 to $97,000	Ordinary selling
2	$97,000	Cluster of 20x to 30x longs liquidated; forced selling
3	$95,500	Cluster of 20x longs from $100,000 liquidated
4	$94,000	Price overshoots as order books thin
5	Recovery toward $97,000	Forced selling ends; buyers step in

This is why crypto charts show sudden long wicks (Module 4, Chapter 3) and why prices often recover after the cascade ends. The selling was forced, not a change in opinion. But for the liquidated traders, the recovery comes too late.

The same works in reverse for shorts: a rally reaches short liquidation levels, forced buying pushes price higher, and a short squeeze follows.

Chapter 8 · How a liquidation cascade builds

A price decline hits a cluster of leveraged longs, forcing liquidations that sell into the market. That selling pushes the price lower, triggering the next cluster, and the loop repeats. Each step down forces more selling until buyers finally absorb the supply.

8.9 Avoiding liquidation

Hash gave Mint and Node a short list.

1. Use low leverage. At 2x to 3x, normal volatility is far from your liquidation price.
2. Always use a stop-loss well before your liquidation price. Decide where your trade idea is wrong (Module 4, Chapter 16), and exit there. Liquidation should never be your exit plan.
3. Check your liquidation price before entering. If it sits inside normal daily volatility (Module 4, Chapter 11), the position is too leveraged.
4. Use isolated margin for speculative trades (Chapter 5).
5. Watch funding, which slowly reduces your margin and moves liquidation closer (Chapter 7).
6. Be most careful during big events, when volatility and cascades are likely.

"So if I'm ever liquidated, I made a mistake before the trade, not during it," said Node.

"Almost always," said Hash. "Either the leverage was too high, or there was no stop, or both."

8.10 Try it yourself

Using the formulas in section 8.3, calculate the long and short liquidation prices for a position at today's BTC price with 3x, 10x, and 25x leverage, assuming a 0.5% maintenance margin. Then compare each adverse move with BTC's current 14-day ATR as a percentage of price. Which leverage levels put liquidation within one or two days of normal movement?

Key takeaways from this chapter

1. Liquidation forcibly closes a position when its margin falls to the maintenance level, and it's permanent.
2. Approximate liquidation prices depend on leverage and maintenance margin: about 9.5% away at 10x and 4.5% at 20x.
3. The liquidation engine closes positions in the market; leftover margin usually goes to the insurance fund.
4. The insurance fund covers losses beyond margin. If it's insufficient, auto-deleveraging can close profitable traders' positions.
5. Larger positions may be liquidated gradually.
6. Clustered liquidations cause cascades and squeezes, creating sharp wicks that often reverse afterwards.
7. Avoid liquidation with low leverage, stop-losses well before liquidation, isolated margin, and attention to funding and volatility.