What Is Liquidation in Crypto? Meaning, Formula and Examples

Short answer: Liquidation in crypto is the forced closing of a leveraged position by the exchange when your losses use up the margin you posted. With 10x leverage, a price move of roughly 10% against you can liquidate the trade; with 50x, about 2%. You lose the margin in that position.

Why liquidation happens

When you trade futures with leverage, the exchange lends you exposure. Your own money (margin) is the safety buffer. If the market moves against you far enough that the buffer is almost gone, the exchange closes the position automatically so that the loss does not exceed your margin.

Approximate liquidation distance

A simple way to estimate how far price can move before liquidation:

Distance to liquidation ≈ 100% ÷ leverage (slightly less after maintenance margin and fees)

Leverage	Approx. adverse move that liquidates you
2x	~50%
5x	~20%
10x	~10%
20x	~5%
50x	~2%
100x	~1%

Crypto prices often move 2% to 5% within hours. That is why high leverage ends so many accounts.

Worked example

• Margin: ₹10,000
• Leverage: 10x, so position size is ₹1,00,000
• You go long at a price of 100

If price falls to about 90.5, your loss is close to ₹9,500 and the remaining margin is below the maintenance requirement. The exchange liquidates the position. You lose nearly all of the ₹10,000, even though the price fell less than 10%.

Isolated vs cross margin

• Isolated margin: only the margin assigned to that trade is at risk.
• Cross margin: your whole futures wallet balance supports the position. Liquidation comes later, but a single bad trade can drain the entire wallet.

Liquidation vs stop-loss

A stop-loss is an exit you choose in advance at a loss you can accept. Liquidation is the exit the exchange chooses when there is nothing left. A properly sized trade hits its stop-loss long before the liquidation price.

How to avoid liquidation

1. Use low or no leverage while learning.
2. Decide the stop-loss before entering, and place it.
3. Size the position from a fixed risk per trade, for example 1% of capital.
4. Keep the liquidation price far beyond your stop-loss.
5. Avoid adding margin to losing trades.

We teach the full calculations in our Crypto Futures & Risk Management course. If you are new, start with spot vs futures.

FAQs

Do I lose all my money in a liquidation?

You lose the margin for that position (isolated) or potentially your full futures wallet (cross). Money held elsewhere on the exchange is not touched.

What is the liquidation price?

It is the price at which the exchange will force-close your position. Exchanges show it on the order screen before and after you open a trade.

Is there liquidation in spot trading?

No. In spot trading you own the asset and there is no borrowed exposure, so there is nothing to liquidate.