Why liquidation exists
Leveraged positions can generate losses larger than the initial margin if risk is not controlled. Exchanges therefore maintain margin requirements and liquidation procedures intended to manage account and counterparty risk.
What can trigger liquidation?
Liquidation generally becomes relevant when position or account equity is no longer sufficient relative to maintenance requirements.
Many crypto derivatives venues use a mark price rather than simply the most recent trade price when evaluating liquidation conditions.
Why liquidation price varies
Liquidation price depends on factors such as entry price, leverage, position size, margin mode, maintenance requirements, fees and potentially other account balances.
Maintenance-margin tiers can also change as position size changes.
Liquidation is not a stop-loss
A liquidation threshold is an exchange risk-control boundary. It is not a substitute for a trader defining acceptable loss.
Liquidation can involve additional fees and execution mechanics. A risk plan should not treat forced liquidation as an ordinary protective exit.
Common mistakes
Using a simple leverage shortcut
Approximate formulas can ignore maintenance margin, fees and venue-specific calculations.
Watching only last price
A venue may use mark price for liquidation calculations.
Adding margin without reassessing risk
Moving the liquidation threshold does not automatically improve the underlying trade thesis.
Maintenance margin is central to liquidation risk
Leveraged positions generally need to maintain a minimum amount of eligible margin relative to their exposure. As losses reduce account or position equity, that margin buffer can shrink.
When the venue's maintenance conditions are no longer satisfied, its risk engine can begin liquidation according to the contract and account rules.
Liquidation is a process, not always one simple fill
Exchange liquidation engines can use partial position reduction, staged liquidation, bankruptcy-price concepts, insurance funds or other mechanisms. The exact process differs by venue and product.
This is why a displayed liquidation price should be interpreted using the exchange's current documentation rather than a universal formula.
Why a displayed liquidation price can change
Position size, added or removed collateral, unrealized profit and loss, maintenance tiers, fees and funding can affect margin conditions. Cross-margin accounts can introduce additional interactions with eligible balances and other positions.
A liquidation estimate shown when the trade opens therefore should not automatically be assumed to remain unchanged.
It should not be treated as a planned substitute for defining acceptable trade risk and exit rules.
Key takeaways
- Liquidation is forced risk management by the venue, not a trader-selected exit.
- Maintenance-margin conditions are central to liquidation.
- Many crypto venues use mark price in liquidation mechanics.
- Exact liquidation calculations must be checked against the specific venue and contract.
Sources & further reading
This lesson is educational material. Market structure, exchange rules, fees, margin requirements and derivatives mechanics can differ by venue and can change over time. Verify current rules with the venue you use.