How Liquidations Work
Initial margin, maintenance margin, the liquidation engine, and the cascade dynamics that produce $1 billion liquidation events. Understand the machinery — because at some point, you'll be on the wrong side of it.
Leverage is the headline feature of crypto perps and the reason most retail traders eventually blow up. Liquidation isn't punishment — it's the exchange protecting itself from losses you can't cover. Understand the math and you stop being surprised. You also start to see liquidation levels in the market as something to trade around, not just survive.
01The setup — margin in two flavors
When you open a leveraged position, you put up a fraction of the position size as collateral. That fraction has two thresholds you need to know:
- Initial margin — what you must post to open the position. At 10× leverage, this is 10% of the position size.
- Maintenance margin — the minimum margin required to keep the position alive. Always smaller than initial margin (typically 0.5–1% of position size for BTC).
Between initial and maintenance, you're in the cushion zone. The position is losing money but the exchange leaves you alone. Drop below maintenance, and the liquidation engine activates.
You put down $30,000 on a $300,000 house (10% — that's your initial margin). The bank's rule: you must maintain at least $3,000 of equity in the home at all times (1% — that's your maintenance margin). The house value falls — you're still fine, because you have a buffer. But if the home value drops far enough that your equity falls below $3,000, the bank takes the house, sells it, recovers their loan. No discussion. Your $30,000 is gone. That's exactly what a liquidation is.
02The math, on a concrete BTC trade
You open a long position on 1 BTC at $63,000 with 10× leverage.
- Position size (notional): $63,000
- Initial margin (10%): $6,300 — what you actually put in
- Maintenance margin (~0.5%): $315 — the floor
BTC starts to fall. Each $1 drop costs you $1 (you're long 1 BTC).
- At BTC = $58,000 → unrealized loss = $5,000. Your remaining margin = $6,300 − $5,000 = $1,300. Painful but well above the $315 floor. You're alive.
- At BTC = $57,000 → loss = $6,000. Margin remaining = $300. Just below maintenance.
- The exchange's liquidation engine takes over. Your position is forcibly closed at the market. Your $6,300 is gone (minus any small leftover after fees).
The higher your leverage, the closer your liquidation level is to your entry. 25× leverage → liquidated on a 4% adverse move. 100× leverage → liquidated on a 1% move. This is why "100× leverage" exists as a marketing feature but is a near-guaranteed account killer in practice.
03What the liquidation engine actually does
When your margin breaches maintenance, three things happen in fast succession:
- The exchange takes over your position. You can no longer close it manually — the liquidation engine has it.
- It places a market order to close. A long position becomes a market sell. A short becomes a market buy. The engine doesn't care about price — it cares about exit.
- The order eats whatever liquidity is on the book. If your position was small, you barely notice. If your position was large, or many positions are being liquidated at the same time, those market orders push price further in the same direction.
04The cascade — why liquidations come in waves
This is the dynamic that produces the famous "$1 billion liquidated in 10 minutes" headlines.
Each domino is a leveraged trader. The closer your liquidation price to current price, the closer your domino is to its neighbor. When price moves enough to topple the first domino (a forced market sell from a liquidated long), that sell pushes price down further — which knocks over the next domino at a slightly lower liquidation price — which pushes price down further — which knocks over the next one. Each liquidation is fuel for the next. Add 50,000 over-leveraged longs and you get a cascade.
This is also why aggressive moves accelerate suddenly. Price drifts down for an hour at a calm pace — then in five minutes, it falls 5%. What happened? The first wave of high-leverage longs hit their liquidation prices. Their forced market sells fed the next wave. The next wave fed the wave after that. The cascade self-feeds until either liquidity catches up or no over-leveraged positions remain at that level.
Many analytics platforms publish liquidation level maps — heatmaps of where leveraged positions are concentrated. Big clusters of longs at $60k → if price drops there, a cascade is likely. Big clusters of shorts at $66k → a push there will trigger a short squeeze. These maps tell you where the dominoes are placed.
05Cross vs isolated margin
One more setting worth knowing:
- Isolated margin — the position has its own dedicated margin. If it gets liquidated, only that margin is lost. The rest of your account is safe.
- Cross margin — the entire account balance is collateral for the position. The liquidation price is further away (good), but if it does get hit, your whole account can be drained (very bad).
Most beginners use cross because the platform defaults to it and the liquidation price looks comfortable. Most pros use isolated, sized correctly, so any single position can't destroy the account. Choose deliberately.
You don't get liquidated because the market "went against you." You get liquidated because your position size and leverage didn't leave enough cushion to absorb the move. Liquidation is a position-sizing problem disguised as a market problem.