Liquidation in crypto is the forced reduction or closure of a leveraged position when the collateral supporting it no longer meets the product's requirements. You can be liquidated while the underlying asset still has substantial value. The problem is that your position cannot satisfy its margin requirement.
Understanding crypto liquidation starts with three numbers: the exposure you control, the equity supporting it, and the minimum equity required to keep it open.
Initial margin and maintenance margin serve different purposes
Initial margin is the amount required to open a position. Maintenance margin is the ongoing requirement for maintaining it. As the market moves, unrealized losses can reduce the equity available to support that position.
You should not assume you can wait for the initial margin to reach zero. A maintenance requirement can cause forced action earlier. Nor should you rely on receiving and responding to a warning before liquidation; the market may move faster than you can react.
A simplified liquidation example
Assume a hypothetical linear BTC long position with:
- Entry price: 50,000 USDT per BTC.
- Quantity: 0.20 BTC.
- Initial exposure: 10,000 USDT.
- Starting collateral: 1,000 USDT.
- An assumed fixed maintenance requirement of 500 USDT for this teaching example.
The starting exposure-to-collateral ratio is 10:1. Ignoring all fees and funding, the calculations are:
Unrealized P&L = 0.20 × (current price − 50,000)
Equity = 1,000 + unrealized P&L
| BTC reference price | Unrealized P&L | Remaining equity |
|---|---|---|
| 50,000 USDT | 0 USDT | 1,000 USDT |
| 49,000 USDT | −200 USDT | 800 USDT |
| 48,000 USDT | −400 USDT | 600 USDT |
| 47,500 USDT | −500 USDT | 500 USDT |
At 47,500, the asset has declined 5%, but the starting collateral has absorbed a 50% loss. The equity has also reached this simplified model's maintenance boundary.
47,500 is not a MERCADE liquidation quote or a reusable liquidation formula. Real contracts may calculate maintenance requirements from current notional value, position tiers, account balances and other inputs. Closing costs and funding can change the result.
The example answers a narrower question: how can a modest asset-price change consume a large portion of margin? A position worth ten times its starting collateral produces ten times the percentage effect on that starting collateral, before costs and other changes.
Why the chart price may differ from the liquidation reference
Many derivatives products use a mark price to assess unrealized profit, loss and liquidation risk. The mark price is a reference valuation and need not match the last trade shown on a chart.
If you only watch the last traded price, you may miss the number being used for the margin check. Record the product's liquidation reference when opening the position, then use the same reference when reviewing an unexpected closeout.
Cross margin and isolated margin expose different collateral
Cross margin allows collateral to support different positions together. Isolated margin assigns collateral to an individual position. These definitions describe how margin is allocated; the specific product determines the detailed rules.
Consider two positions sharing collateral. A loss on one can reduce the buffer supporting the other. Evaluating each trade separately may therefore understate the account's combined exposure.
For an isolated position, also check whether any automatic margin top-up is enabled. Your own settings can affect how much additional money becomes available to support a losing trade.
What actually changes liquidation risk?
Separate changes to exposure from changes to collateral.
Reducing quantity reduces price sensitivity. In the example, 0.10 BTC would lose 100 USDT for a 1,000 USDT price decline, compared with 200 USDT for 0.20 BTC.
Adding collateral increases the supporting buffer. It does not reduce the price loss on an unchanged position. The original 0.20 BTC still loses 200 USDT for the same adverse move, while more of your money becomes committed.
A planned exit can close exposure earlier. Its usefulness depends on triggering and execution. It does not ensure that liquidation is impossible.
The CFTC warns that leverage amplifies adverse moves and that losses on some futures arrangements can exceed initial investment. Product protections differ, so do not infer a universal loss cap from the margin initially posted. CFTC virtual-currency trading advisory.
Questions to answer before opening a leveraged position
- What is the full position value, rather than only the deposit amount?
- Which price and account metric trigger forced action?
- Which balances can support the position?
- What costs can reduce those balances while you hold?
- What is your exit plan before reaching the estimated liquidation level?
If you cannot answer those questions from the contract specifications, the leverage setting alone is not enough information to evaluate the trade.
Frequently asked questions
Can ordinary spot holdings be liquidated because their price falls?
Unleveraged spot holdings are not subject to the margin-liquidation process described here. Their market value can still fall severely. Borrowing against those holdings introduces separate collateral requirements.
Does liquidation always close the entire account?
No. Products can use partial reductions or full closures according to their rules. The affected collateral also depends on the margin arrangement.
Does changing the leverage number remove losses?
No. For unchanged exposure, the same price move produces the same price P&L. What matters is the resulting position size and collateral allocation, not the label alone.
Review the MERCADE contract trading overview for the terms to examine, or use our spot vs contract comparison to identify the product you intend to use.
Educational information only. Leveraged crypto trading can result in rapid, substantial losses. The simplified calculation above is not an exchange liquidation calculator.
