Glossary
Liquidation
The forced closure of a leveraged position by the exchange when losses have consumed the margin backing it.
When you open a leveraged position you post margin — a fraction of the position's notional value. If the market moves against you far enough that the remaining margin falls below the maintenance level, the exchange closes the position at market to stop the loss growing beyond what you posted. That closure is a liquidation. You lose the margin, and on most venues a liquidation fee on top.
The distance to liquidation depends on leverage. At 10× a move of roughly 10% against you wipes the position; at 50×, roughly 2%. Crypto moves 2% in minutes routinely, which is why high leverage on perpetuals is the fastest way to lose an account, and why every derivatives venue shows the liquidation price before you confirm an order.
Exchanges maintain an insurance fund for the case where a liquidation cannot be filled at a price that covers the loss — a fast crash through a thin book. If the fund is exhausted, some venues use auto-deleveraging, closing profitable positions on the other side to balance the books. That is a risk to the winning side, and it is why the insurance fund column on our safety-scores page matters to derivatives traders specifically.
Where this shows up
Frequently asked questions
Can I lose more than my margin?
On the major venues, no: the insurance fund and auto-deleveraging exist so that a trader's loss is capped at the margin posted. You can lose all of it, and a liquidation fee is taken from it.
How do I avoid liquidation?
Lower leverage, a stop-loss placed before the liquidation price, and never funding a position with more than you are prepared to lose in a single move.
Related terms and pages
Related terms
- Perpetual futures
A leveraged derivative that tracks an asset's price with no expiry date, kept in line with spot through a periodic funding payment between longs and shorts.
- Insurance fund
A pool of assets an exchange sets aside to cover losses — either customer losses after a security incident, or liquidation shortfalls on derivatives, depending on the fund.
- Funding rate
The periodic payment between long and short holders of a perpetual futures contract that keeps its price anchored to spot.
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