Crypto Liquidation Is: An In-Depth Understanding of Risks and How to Overcome Them

Crypto liquidation is one of the most concerning mechanisms in the margin trading world. When you trade with leverage, it essentially means you are borrowing funds from the exchange to amplify your position. However, when the market moves against your prediction, the exchange will automatically close your position without waiting for your approval — this is crypto liquidation.

The crypto market operates 24/7 without pause. Extreme volatility can occur at any time, even within minutes. That’s why understanding crypto liquidation is an essential skill for every trader looking to trade with leverage.

What Is Crypto Liquidation: Basic Mechanisms and Its Impact

Crypto liquidation is the process of automatically closing your trading position when the collateral (margin) no longer suffices to maintain that position. When you open a leveraged position, you must deposit a certain amount of money as initial collateral. The exchange will lend additional funds based on the leverage ratio you choose.

But if the crypto price moves against your prediction, the collateral value will continue to decrease. When the collateral reaches the minimum required level (called the maintenance margin), the system will trigger a margin call — a warning that you need to add funds. If you do not respond or lack additional funds, crypto liquidation becomes an unavoidable outcome.

What does this mean financially? You could lose part of your initial capital, or in the worst case, your entire initial margin. The exchange will also charge an additional liquidation fee, which further increases your losses.

Why Leverage Is a Double-Edged Sword for Traders

Leverage is a very powerful tool but also very dangerous. Using leverage, traders can generate multiple profits from relatively small price movements. For example, with 10x leverage, a 5% price movement can yield a 50% profit on your position.

But leverage also works in the opposite direction. Adverse price movements will be amplified. That’s why understanding crypto liquidation is the first step in your risk management. Before opening a leveraged position, you must understand how much you could lose, not how much you could gain.

Many traders fall into the mindset of “small capital, big gains.” They forget that every rupiah borrowed from the exchange must be repaid, regardless of their trading outcome. This is why many traders experience crypto liquidation — they ignore fundamental risk management principles.

Forced Liquidation Process: Margin Call and Automatic Closure

Crypto liquidation occurs in several stages, and understanding each stage is crucial.

First, when the price moves against your position, its value decreases. The system will continuously monitor your margin ratio. When this ratio reaches a critical level (usually around 20-40%, depending on the exchange policy), a margin call is automatically triggered.

A margin call is a formal request from the exchange for you to deposit additional funds within a very short period — often just a few minutes. This is your last chance to save your position. If you have funds in your account or can transfer money quickly, you can add collateral and avoid crypto liquidation.

However, if you do not react quickly enough or lack additional funds, the exchange will no longer wait. The system will mechanically sell all or part of your position at the current market price, realizing your losses. This is forced liquidation, and traders have no control over it.

Important detail: the exchange will charge a liquidation fee at this point. This fee is part of the exchange’s strategy to encourage traders to close positions voluntarily before reaching automatic liquidation. In other words, it’s cheaper for you to proactively close losing positions than to wait for forced liquidation.

Liquidation Price: Calculating Your Critical Position Point

The liquidation price is an important term you need to understand before opening a leveraged position. It is the price point at which the system will automatically sell your position without giving you any further chance to react.

The liquidation price is not fixed and will differ for each trader. Its value is determined by several factors:

• Leverage used: The higher the leverage, the closer the liquidation price is to your entry price
• Current crypto price: Price fluctuations will change the liquidation price in real-time
• Position size: The larger your position, the greater the impact of price fluctuations
• Maintenance margin level: The minimum requirement set by the exchange
• Remaining account balance: If you have reserve funds in your account, this provides an additional buffer

For example, if you buy Bitcoin with 10x leverage and Bitcoin drops 9%, your position is already at a 90% loss of the initial margin. If Bitcoin drops 10%, the liquidation price may have been reached, and crypto liquidation is an inevitable outcome.

Professional traders always calculate their liquidation price before opening a position. Modern exchanges provide calculators and real-time indicators showing your liquidation price. Ignoring this number can be a very costly mistake.

Two Types of Liquidation and Their Implications

Crypto liquidation is divided into two categories based on how much of your position is closed.

Partial Liquidation: Reduced, But Still Alive

Partial liquidation occurs when only part of your position is closed by the system. This mechanism is designed to quickly reduce risk without completely destroying your position.

For example, if you hold 100 Bitcoin with 5x leverage, partial liquidation might close 60 Bitcoin first to bring the margin ratio back to a safe zone. You still retain 40 Bitcoin, and your position remains open. This is often a voluntary liquidation, where you accept partial losses while still hoping for recovery.

Total Liquidation: Total Ruin

Total liquidation is the worst-case scenario. It means the system closes 100% of your position to cover the losses incurred. Total liquidation is usually a forced liquidation, occurring when the trader fails to meet the maintenance margin requirements even after a margin call.

In extreme situations, crypto liquidation can result in a negative account balance. This means you not only lose all your initial collateral but also owe money to the exchange. Fortunately, most modern exchanges have insurance funds that absorb such losses to protect traders. However, this also means the exchange uses community funds to cover your losses.

Prevention Strategies for Liquidation: Stop-Loss and Risk Management

The most important step to avoid crypto liquidation is careful planning and strict risk management before opening a position.

Strategy 1: Set a Risk Percentage Before Trading

The first step is to determine what percentage of your total trading account you are willing to risk per trade. Industry experts recommend conservative figures: only 1% to 3% of your account per position.

Why so small? Because with a 1% risk, you would need 100 consecutive losses to wipe out your entire account. Even in the highly volatile crypto market, this scenario is almost impossible. Conversely, risking 10% per trade means only 10 consecutive losses could bankrupt you — much more realistic.

Discipline in this area is the difference between traders who survive long-term and those who get wiped out by crypto liquidation.

Strategy 2: Always Use Stop-Loss Orders

A stop-loss order is an automatic sell order you set at a specific price. If the market reaches that price, your position is automatically sold to limit your losses.

Practical example: you buy Bitcoin at $40,000 with 5x leverage. You set a stop-loss at $39,200 (2% below entry). If Bitcoin falls to $39,200, your order automatically sells Bitcoin, capping your loss at just 2% of the initial collateral — not a full liquidation.

Stop-loss orders are simple yet powerful tools. They give you control over maximum losses before opening a position. They also protect you from panic during market crashes. Without a stop-loss, you might panic and make worse decisions, or often, do nothing and let crypto liquidation happen.

Strategy 3: Choose Reasonable Leverage

This may seem obvious, but many beginner traders open positions with the maximum leverage offered by the exchange. This is a fatal mistake.

If you lack experience, start with 2x or 3x leverage. This is enough to amplify your potential gains but still provides a reasonable buffer before crypto liquidation occurs. As your experience and discipline grow, you can gradually increase leverage.

Crypto Liquidation: A Daily Threat to Watch Out For

Crypto liquidation is a mechanism designed by exchanges to protect themselves, not traders. However, understanding crypto liquidation is like understanding the rules of the game. Traders who know the rules have a real advantage.

The key to avoiding liquidation is awareness and planning. Before opening a leveraged position, you should know:

• Your liquidation price
• The percentage risk you are taking
• Where you will place your stop-loss

The crypto market is a volatile financial battleground. Those unprepared will quickly fall victim to crypto liquidation. But with solid risk management strategies, you can trade with leverage safely and profitably.

Remember: big profits come with big risks. Your job is to manage those risks well so that when the unexpected happens, you won’t face devastating crypto liquidation.