A crypto liquidation is a forced reduction or closure of a leveraged position after its collateral or account equity falls below a required margin threshold. It is not an ordinary sale: an exchange risk system or a DeFi protocol rule initiates it. In futures trading, liquidation protects the venue against a position becoming under-collateralized; in DeFi lending, it allows pledged collateral to be sold to repay a loan. The triggers and execution rules differ by platform and product.
How leverage and margin lead to liquidation
Leverage lets a trader control more exposure than the collateral they deposit. That can magnify gains, but it also magnifies losses relative to the posted margin: a comparatively small adverse price move can use up the available cushion.
Two margin terms explain the basic threshold:
- Initial margin is the collateral required to open a leveraged position.
- Maintenance margin is the minimum equity required to keep it open.
Binance Academy illustrates the distinction with a hypothetical $1,000 ETH position at 10x leverage, which requires $100 in initial margin. This is an educational example, not a current contract quote or a recommendation. If a long position loses value as the asset price falls, its unrealized loss reduces account equity. If equity can no longer meet maintenance requirements, the venue may reduce or close the position. A short faces the analogous risk if the price rises. The precise threshold depends on factors such as leverage, position size, collateral, fees, funding, margin mode, and the venue’s rules.
There is no single liquidation formula that applies to every crypto contract. Check the contract’s current specifications and the exchange’s margin rules rather than relying on a generic calculator or a liquidation price copied from another platform.
Liquidation price, margin mode, and trigger price
Isolated versus cross or portfolio margin
With isolated margin, collateral is allocated to a particular position, and the venue may show a position liquidation price. Bybit’s documentation says liquidation in isolated mode occurs when the mark price reaches that level. In cross or portfolio margin, risk is assessed against account-level equity and relevant maintenance requirements; Bybit describes its displayed liquidation prices in those modes as dynamic references because account equity and margin usage can change. Other venues may calculate or display these values differently.
Mark price versus last traded price
The price that triggers liquidation may not be the last price shown on a chart. Bybit says its described liquidation process uses mark price, a risk reference, rather than the last traded price, which is the most recent trade. That distinction can matter when a stop-loss uses a different trigger basis.
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Bybit illustrates the issue with a hypothetical long position: the last traded price is 12,050 USDT, the liquidation price is 12,000 USDT, and a stop-loss is set to trigger at 12,030 USDT based on last traded price. If mark price reaches 12,000 while last traded price remains at 12,050, liquidation can occur before that stop-loss triggers. Those figures are the exchange’s illustration, not live market prices. A stop-loss can limit exposure when it triggers and executes as intended, but it is not a guarantee against liquidation.
What an exchange may do after a trigger
Liquidation procedures vary. They may involve a partial reduction before a full close, and some venues describe a sequence of measures to manage a position that has become increasingly risky. Coinbase Global Exchange describes its own process in relation to current margin, initial margin, maintenance margin, and close-out margin:
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- Below initial margin, the account can be put into reduce-only mode.
- Below maintenance margin, positions may be partially liquidated to move the account toward a safer margin level.
- Below close-out margin, Coinbase describes a further risk sequence involving other available funds, liquidity support providers, and, if needed, auto-deleveraging.
This is Coinbase Global Exchange’s documented approach, not an industry-wide template. For its explanation of the platform-specific thresholds and sequence, see Coinbase’s liquidation-waterfall help page.
Backstops for losses beyond collateral
Exchanges may also describe insurance funds or other mechanisms for losses that remain after liquidation. Binance’s futures explainer discusses an insurance fund and auto-deleveraging, which can select opposing traders based on factors including leverage and profitability. Coinbase describes its own insurance fund and says opposing-side funds may be clawed back to cover negative balances if the fund is depleted in an extremely rare large-scale event. These are venue-specific disclosures, not identical protections or guarantees for every trader.
Binance’s 2021 worked example uses 20x leverage, 5% initial margin, and 0.5% maintenance margin. Those values illustrate the article’s example; they should not be treated as current specifications for a Binance contract or another exchange.
How DeFi lending liquidations differ
In collateralized DeFi lending, a borrower pledges crypto to secure a loan. If the collateral’s value falls too far relative to the debt under a protocol’s rules, the protocol can permit liquidators to sell some collateral to repay the loan. The execution follows smart-contract rules and may involve third-party liquidators who receive an incentive or discount.
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Outbyte Driver Updater FREEScan for outdated or missing drivers - takes under a minuteDriver Scan →Outbyte PC Repair FREEClear out junk files and repair common Windows errorsFree Scan →This shares the same broad idea as futures liquidation—collateral has fallen below a risk threshold—but it is not the same process. A futures venue’s risk engine takes action on a leveraged trading position; a lending protocol’s rules govern the sale of collateral securing a loan. Thresholds, incentives, and execution details are protocol-specific.
A 2020 study of Compound lending markets reported that a 3% asset-price variation could make over $10 million liquidable, and that over 70% of liquidable positions in the study’s sample were immediately liquidated. The sample extended through September 6, 2020; these are historical findings from the paper’s methodology, not current estimates for DeFi as a whole.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check before using a leveraged product
Before opening a position, review the specific contract and account settings—not just the displayed liquidation price. In particular, check:
- Whether margin is isolated, cross, or portfolio, and which collateral supports the position.
- Whether liquidation is triggered by mark price or another price reference, and what price basis your stop-loss uses.
- The applicable initial and maintenance margin requirements, including any position-size risk tiers.
- Whether the venue starts with partial reductions or can close the position, and what happens if collateral is insufficient.
- How fees and funding affect account equity over time.
- What the venue’s documentation says about insurance funds, liquidity support, auto-deleveraging, or clawbacks.
Crypto markets can remain open continuously, and perpetual contracts can carry funding costs. Leverage magnifies both gains and losses; choosing a lower or higher leverage level does not remove the possibility of liquidation. Read the rules for the exact product and margin mode you plan to use.
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Quick Recap
Sources and platform scope
- Bybit Help Center: “FAQ — Order Execution and Liquidation” (current support documentation reviewed October 7, 2026).
- Coinbase Help: liquidation waterfall and margin requirements (current Global Exchange help documentation reviewed October 7, 2026).
- Binance Support: “How Liquidation Works in Futures Trading” (published August 20, 2021).
- Binance Academy: “What Is Leverage in Crypto Trading?” (reviewed October 7, 2026).
- “Liquidations: DeFi on a Knife-edge” (2020 paper).
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