Liquidation
Also called: forced liquidation · getting liquidated · rekt
Definition
Liquidation is when an exchange forcibly closes your leveraged position because your margin has fallen below the maintenance margin requirement.
How liquidation works
Every leveraged position has a point where your remaining margin is no longer enough to cover further losses. When the mark price reaches that point, the exchange's liquidation engine takes over the position and closes it, either all at once or in steps for larger positions. You usually lose most or all of the margin for that position, and many exchanges also charge a liquidation fee.
Liquidation exists to protect the exchange and other traders from losses larger than the collateral. If the engine closes a position at a better price than the bankruptcy price, the surplus often goes to the insurance fund. If the market moves too fast, the insurance fund covers the shortfall, and in extreme cases auto-deleveraging (ADL) reduces profitable opposing positions.
Large waves of liquidations can feed on themselves: forced selling pushes price lower, which triggers more liquidations. This is why crypto sometimes moves very fast. To avoid liquidation, use lower leverage, keep a stop-loss well before the liquidation price, and size positions so one move cannot wipe you out.
Example
Suppose you open a 20x long on BTC at 50,000 USDT with 1,000 USDT of margin, a 20,000 USDT position. A 1% drop costs you 200 USDT. With a maintenance margin rate of 0.5%, the position is liquidated after a drop of roughly 4.5%, near 47,750, when your margin has shrunk to about 100 USDT. If a stop-loss at 49,000 had triggered first, you would have lost about 400 USDT instead of almost all 1,000.
Common mistakes
- Treating the liquidation price as your stop-loss.
- Watching the last price on a chart while the exchange liquidates on the mark price.
- Re-entering with higher leverage straight after being liquidated to win back the loss.
Learn and practise
FAQ
What does it mean to get liquidated in crypto?
Your leveraged position was closed by the exchange because losses used up your margin. The collateral for that position is mostly or fully lost.
Can I get my money back after liquidation?
No. Liquidation is final and the lost margin is not returned, which is why a stop-loss is important.