Liquidation
Category
Krypto-spezifisch
Sub-category
Liquidationen & Open Interest
Curated by
Last reviewed
Liquidation is the forced closure of a leveraged position by the exchange or broker when the deposited margin falls below the minimum requirement (maintenance margin). In crypto trading this happens automatically at the pre-calculated liquidation price. Mass liquidations can trigger cascades in which forced sales cause further liquidations and accelerate moves extremely.
Context & Mechanics
Definition and mechanics
Anyone trading with leverage deposits only a fraction of the position value as margin. If the position runs into the red, this cushion shrinks – and the exchange must intervene before the loss exceeds the collateral: with classic brokers a margin call often precedes this (a demand to top up), in crypto derivatives trading the liquidation happens automatically and without warning at the liquidation price, calculated from entry, leverage and maintenance margin. The higher the leverage, the closer this price sits to the entry: at 10x leverage roughly 9–10% of adverse movement suffices, at 50x under 2% – normal market noise is then enough.
Liquidation cascades
Liquidations are themselves market orders: the forced closure of a long position is a sale that presses price further down – triggering the next liquidation prices. This chain reaction is called a liquidation cascade and explains the characteristic minute-fast crashes and squeezes in leveraged markets. Context metrics are open interest (built-up leveraged positions) and the funding rate (one-sided positioning): high values of both historically mark a cascade-prone environment.
Avoiding liquidation
Liquidation is always the most expensive end of a trade: it realises the maximum loss of the margin, frequently plus a liquidation fee. The professional approach: a stop-loss well before the liquidation price caps the loss at the planned amount – liquidation remains the emergency brake but never becomes the active exit. Added to this is the backwards calculation in position sizing: first set account risk and stop distance, then position size – keeping the distance to the liquidation price structurally large.
Why it matters for traders
Not knowing one's own liquidation price means not knowing one's maximum risk. In the GlanWick simulator, liquidation scenarios of leveraged positions can be played through by way of example without real capital – GlanWick is a training and simulation tool and not a prop firm itself.
Execution Example
A trader opens a long position of $100,000 in a perpetual future at 10x leverage: $10,000 margin, entry at $50,000 per unit (2 units). The exchange's maintenance margin is 0.5% of position value.
- Buffer: the $10,000 margin may melt down to the maintenance threshold of ≈$500 → tolerable loss ≈$9,500 = 9.5% price decline.
- Liquidation price: 50,000 × (1 − 0.095) ≈ $45,250. If price falls there, the exchange closes the position automatically – the margin is lost except for residual amounts, plus a liquidation fee.
- Stop alternative: a stop-loss at $49,500 (−1%) caps the loss at ≈$1,000 (1R on a $100,000 account) – one tenth of the liquidation loss.
- Cascade context: if many participants' liquidation prices sit in the same area (high open interest after a one-sided rise), a pullback there can trigger a cascade – price often cuts through such zones fast and with high slippage.
Execution Risk & Errors
Not knowing one's own liquidation price or checking it only after opening the position
Using liquidation as a stop substitute and thereby always realising the maximum loss
Choosing leverage so high that normal market noise reaches the liquidation price
Topping up margin into a falling position instead of closing the trade
Ignoring cascade risk when open interest and funding rate are overheated
Frequently Asked
What is the difference between liquidation and margin call?
The margin call is the demand to add capital before forced closure – common with classic brokers. In crypto derivatives trading this stage usually does not exist: the position is closed automatically at the liquidation price.
Can I lose more than my margin in a liquidation?
On EU-regulated retail CFD accounts negative balance protection prevents further claims. On crypto exchanges insurance funds and auto-deleveraging limit risk beyond the margin – details vary by provider.
How do I calculate my liquidation price?
Approximately: entry × (1 − (1/leverage − maintenance rate)) for longs. Decisive is always the respective exchange's calculation, which includes fees and mark-price logic – most platforms display the value directly.
What is a liquidation cascade?
A chain reaction: forced closures are market orders that press price further in the same direction and thereby trigger the next liquidation prices. This creates the typical minute-fast crashes of leveraged markets.