What you'll learn Liquidation is not a sudden exchange decision — it is the point where the rules say your remaining margin cannot support the position. This guide explains that trigger, the closing process, bankruptcy prices and market-wide cascades using mechanics only.

The maintenance-margin trigger

Every open leveraged position must keep a minimum amount of collateral relative to its size — the maintenance margin requirement. While the position's margin is above that line, it stays open. The moment an adverse move, deducted fees or funding payments pull the margin to the line, the position is eligible for liquidation:

position margin ≥ maintenance margin → open
position margin < maintenance margin → liquidated

Three inputs erode the margin that is being compared to the line:

  • Adverse price movement — unrealized losses reduce remaining margin.
  • Fees — opening and closing fees are charged against the position.
  • Funding payments — settled repeatedly from margin while price can be flat (see the funding guide).

The relationship between leverage and how quickly that line is reached — roughly the reciprocal of leverage, shorter in practice — is worked in the leverage guide.

What the exchange does at liquidation

Liquidation on most crypto venues is automatic: unlike a traditional margin call that asks you to add funds, the position is taken over and closed by the exchange's engine without waiting for a response. The typical sequence:

  1. Trigger. The engine detects margin at the maintenance line (evaluated against a mark price designed to avoid manipulation on one venue).
  2. Takeover. The position is closed at the exchange's direction; the trader no longer controls it.
  3. Market close. The engine submits orders to unwind the position into the market.
  4. Settlement. Remaining collateral after the close, the liquidation fee and any other charges is returned; in many cases little or nothing remains.

Because the close is a market order into whatever liquidity exists, the actual execution can differ from the last price shown when the trigger occurred — particularly when many positions trigger at once.

Liquidation price vs bankruptcy price

Two prices describe different moments and are often confused:

PriceMeaningWhat happens there
Liquidation priceThe price at which margin hits the maintenance requirement and the engine takes overPosition is closed early enough to try to recover its obligations
Bankruptcy priceThe price at which the assigned margin would be exactly zero with no feesFor a long: entry × (1 − initial margin fraction); for a short: the mirror calculation

Illustrative isolated long, fees and funding ignored: 1,000 USD margin at 10x opens 10,000 USD notional. The bankruptcy price sits roughly 10% below entry, where the 1,000 USD margin is exactly consumed. The liquidation price is reached before that — at the maintenance-margin line — deliberately early, so the close can be executed while collateral still exists. Closing only at bankruptcy would leave no room for slippage.

Fees, insurance funds and ADL

A separate liquidation fee is typically charged on top of the lost margin. What happens if the market close cannot recover the position's obligations depends on two backstops:

  • Insurance fund. When a position closes better than bankruptcy, the surplus can go to an insurance fund; when closes fall short, the fund can cover the gap so winning counterparties are still paid.
  • Auto-deleveraging (ADL). If the insurance fund is exhausted, profitable positions can be unwound automatically to settle the shortfall. Venues publish an ADL ranking indicating which positions would be selected first.
The purpose of early liquidation, fees, the insurance fund and ADL is one thing: ensuring losses on one account do not become unpaid debts to another trader.

Cascading liquidations

Liquidation engines and crowded positioning can form a feedback loop:

  1. An initial move triggers a cluster of leveraged positions.
  2. Their forced market closes push price further in the same direction.
  3. That move triggers the next cluster, whose closes push price again.
  4. Thin liquidity and stop orders executing late amplify each step.

This is why sharp perp-market moves can accelerate well beyond the original trigger, and why stops during such events may fill far from their prices. "Liquidation maps" showing historical clusters describe where positions were actually liquidated in past conditions — they are not predictions that the same prices will act as magnets next time.

Risk framing Mechanics-based checks before and during a position: What is the maintenance-margin tier for your exact notional (larger positions often face stricter tiers)? How far is the liquidation price after fees and expected funding? Could a normal-gap move skip past any planned exit — and what is the exit actually worth if many positions share your level? These questions measure exposure; they contain no price forecast.