Liquidation

Liquidation occurs in margin and futures trading when a position's unrealised losses consume enough of the deposited collateral (margin) that the exchange must act to prevent further loss. Rather than allowing a trader's account to fall into negative equity — a debt the trader may not be able to repay — the exchange's liquidation engine closes the position automatically. How the liquidation price is calculated Each position has a liquidation price determined by the leverage used, the entry price, and the maintenance margin requirement. For a long position, liquidation triggers when the mark price falls to that level; for a short position, when it rises to it. The higher the leverage, the closer the liquidation price is to the entry price. Example: a trader opens a 10× leveraged long on BTC at $60,000 with $1,000 collateral (controlling $10,000 of exposure). A 10% price drop to $54,000 would represent a $1,000 loss — wiping out the entire collateral. The exchange liquidates the position at or before this price to cover the loss. Partial vs full liquidation Some exchanges use partial liquidation, reducing position size in stages to bring the margin ratio back above the maintenance threshold. Others execute a full liquidation in a single step. Partial liquidation is generally more trader-friendly as it preserves a portion of the position if the price recovers quickly. Insurance funds and auto-deleveraging When market conditions are volatile, liquidation orders may not fill at the expected price. If the position closes at a worse price than the liquidation level, the exchange's insurance fund absorbs the difference. If the insurance fund is insufficient, exchanges use auto-deleveraging (ADL) — automatically reducing the positions of the most profitable traders on the opposite side to cover the shortfall. Cascade liquidations Liquidations can trigger cascading sell pressure. When a large long position is liquidated, the forced selling pushes the price down further, triggering other long liquidations in a feedback loop. These cascade events are visible on-chain and in liquidation data, and the CryptoMantiq Liquidation Agent monitors them as a key market signal. How to avoid liquidation Use lower leverage to give positions more room to breathe Set stop-loss orders well above the liquidation price Add collateral when the margin ratio approaches the maintenance threshold Monitor the mark price, not just the last traded price