Leverage and Liquidation in Crypto: How Liquidation Works

Leverage lets you control a position bigger than the money you put up, and liquidation is what happens when the market moves far enough against you that the exchange closes the position for you. This guide explains how both work, shows the formula behind the liquidation calculator, and ends with the part most people skip: how to size a leveraged trade by risk instead of by "max leverage". It pairs with the position sizing and stop-loss guide and the stop placement ideas in the swing trading guide.

This is educational content, not financial advice, and it does not recommend leverage. Leverage is optional, and many careful traders never use it.

What leverage is

When you trade with leverage, you put up a smaller amount called margin and borrow the rest of the position's value from the exchange. Your position size is the full value you control. Leverage is the ratio between the two.

• At 10x, your margin is one tenth of the position. $1,000 of margin controls a $10,000 position.
• At 2x, margin is half the position. $1,000 controls $2,000.
• At 100x, margin is one hundredth. $1,000 controls $100,000.

Leverage multiplies results in both directions, because your profit or loss is calculated on the whole position while your capital at stake is only the margin. At 10x, a 5% move in your favour is a $500 gain on $1,000 of margin, a 50% return on the margin. A 5% move against you is a $500 loss, a 50% loss of the margin. The leverage itself does not make you right more often. It makes every move count for more.

Isolated versus cross margin

Exchanges usually offer two margin modes.

Isolated margin assigns a fixed amount of margin to one position. If the trade goes badly enough, you lose that margin and the position is closed, but the rest of your balance is untouched. Your worst case is known in advance.

Cross margin lets the position draw on your whole account balance as a cushion. The liquidation price is much further away, which looks safer. The catch is that a bad enough move can take the entire balance, and other open positions can be pulled into the same pool. Cross margin trades a close, visible risk for a distant, much larger one.

If you are learning, isolated margin makes the maximum loss clear and is the mode the calculator below assumes.

What liquidation is

Your margin is a buffer. As price moves against you, that buffer shrinks. The exchange needs the position to stay covered, so it sets a floor called the maintenance margin: the minimum amount, usually a small percentage of the position's value, that must remain. When the remaining margin falls to that floor, the exchange liquidates the position, closing it automatically. You lose the margin, and you do not get to choose the price or the moment.

Liquidation is not the same as a stop-loss. A stop is your own order, placed where you decide your idea is wrong. Liquidation is the exchange's order, placed where your borrowed money is at risk. The whole discipline of leveraged trading is making sure your stop is hit before the liquidation price, never after.

The liquidation price formula

For an isolated-margin position, ignoring fees and funding, the liquidation price follows from the margin and the maintenance margin. Let the leverage be L and the maintenance margin be m (as a decimal):

• Long: liquidation price = entry x (1 - 1/L + m)
• Short: liquidation price = entry x (1 + 1/L - m)

The logic: margin is 1/L of the position, so a move of 1/L against you would erase it entirely. The exchange steps in a little earlier, when the move reaches 1/L minus m.

Worked example: a 10x long and a 10x short

Entry at $100, 10x leverage, 0.5% maintenance margin (m = 0.005).

• Long: $100 x (1 - 0.1 + 0.005) = $100 x 0.905 = $90.50. That is a 9.5% fall from entry.
• Short: $100 x (1 + 0.1 - 0.005) = $100 x 1.095 = $109.50. That is a 9.5% rise from entry.

Check it with money. $1,000 of margin at 10x controls a $10,000 position. A 9.5% fall loses $950, leaving $50 of margin. And $50 is 0.5% of the $10,000 position, exactly the maintenance floor. That is where the exchange closes you out.

The leverage table

The move that liquidates you is 1/L minus the maintenance margin. Here it is for a 0.5% maintenance margin, with the liquidation prices for an entry of $100:

Leverage	Move to liquidation	Long liquidates at	Short liquidates at
2x	49.5%	$50.50	$149.50
3x	32.83%	$67.17	$132.83
5x	19.5%	$80.50	$119.50
10x	9.5%	$90.50	$109.50
20x	4.5%	$95.50	$104.50
50x	1.5%	$98.50	$101.50
100x	0.5%	$99.50	$100.50

At 100x, a 0.5% move wipes you out, and fees and a little slippage can bring that even closer.

Now compare those percentages to how crypto actually behaves. Swings of several percent are routine in the larger coins, and smaller coins move more. A normal day can therefore contain a move bigger than the 20x, 50x and 100x rows, and intraday wicks go further than daily closes. In a sharp sell-off, and especially in smaller coins, even the 5x and 10x rows can come under threat. The low-leverage rows usually survive ordinary days. The high-leverage rows often do not.

Reading a chart against the table

Here is Bitcoin with the MACD indicator beneath the price. To use it for this guide, pick any visible peak and the next trough on the price line, estimate the fall between them in percent, and hold that against the "move to liquidation" column. A peak-to-trough move of 5% means a 20x long opened at the peak would already be gone, while a 10x long would survive it. Then look at the MACD histogram below: tall bars mark the stretches where momentum is strongest, which are the fast moves that stress leveraged positions the most. Remember that a daily chart hides the intraday wicks that liquidate people in practice.

Why exchange numbers differ from the formula

The formula is a clean model. Real exchanges differ from it, and your platform's own liquidation figure is the one that counts. Common reasons for the gap:

• Tiered maintenance margin. Many exchanges raise the maintenance rate as the position gets larger, so a big position liquidates sooner than a small one at the same leverage.
• Mark price. Liquidation is usually triggered by a "mark price", a reference price built from several markets, not the last traded price on the chart. A wick on one venue may or may not trigger it.
• Fees. Trading fees, and often a separate liquidation fee, reduce the margin you have.
• Funding. Payments on perpetual contracts (below) change your margin over time.
• Cross margin and other positions. Your balance and other trades can shift the liquidation price.
• Contract type. The formula fits linear contracts margined in a stablecoin. Contracts margined in the coin itself work differently.

So treat the calculator as a way to see the scale of the risk, not as a promise of the exact price. Always check the number your exchange displays before you open the trade.

Perpetual contracts and funding rates

Most crypto leverage is traded through perpetual contracts, often just "perps". Unlike a traditional futures contract, a perp has no expiry date, so you can hold it as long as your margin holds out.

Without an expiry, something has to keep the perp price close to the spot price. That something is the funding rate, a periodic payment exchanged directly between traders holding long and short positions. When the perp trades above spot, longs generally pay shorts. When it trades below, shorts generally pay longs. The exchange does not keep this money, but you either pay it or receive it.

Funding changes with market conditions, can flip sign, and can be small or significant. It is a running cost that you can't see on the price chart. A trade that is flat in price can still lose money to funding if you are on the crowded side, and a leveraged position held for days pays that cost many times over. CoinSeekly does not track funding rates, so check the current rate on your exchange before holding a perp for any length of time.

Stops must sit before the liquidation price

A stop-loss that sits beyond the liquidation price is decoration. Price reaches the liquidation level first, the exchange closes the position, and your stop never fires. You lose the margin instead of the loss you planned.

Take a long entered at $100 with a stop at $95:

• At 10x, liquidation is at $90.50. Price hits your $95 stop first. The stop works as planned.
• At 20x, liquidation is at $95.50, which is above the stop. Price reaches $95.50 first, you are liquidated, and the stop never gets the chance. The calculator flags exactly this case.

Real fills add slippage to a stop, so being one tick on the right side is not enough. You want real distance between where the stop sits and where liquidation sits, and remember that a stop can fill worse than its price in a fast market. The position sizing guide covers where stops belong, and the breakout trading guide is a good reminder of why: breakout levels often get retested or wicked through, and a leveraged position with a stop tucked just under the level has no room to survive that.

Size by risk, not by maximum leverage

Exchanges let you pick a high leverage number, and that tempts people to treat it as the target. It is not. Leverage changes how much margin you tie up. It does not change how much you should risk.

Use the same sizing method as for any trade. Account $10,000, risk 1% = $100, entry $100, stop $95:

• Distance to stop: $5 per unit.
• Units: $100 / $5 = 20 units.
• Position value: 20 x $100 = $2,000.

The position is $2,000 whatever the leverage. Only the margin changes:

Leverage	Margin tied up	Loss at stop as share of margin	Long liquidation	Stop before liquidation?
2x	$1,000	10%	$50.50	Yes
5x	$400	25%	$80.50	Yes
10x	$200	50%	$90.50	Yes
20x	$100	100%	$95.50	No

The planned loss is $100 in every row. Higher leverage frees more of your cash, but a $100 loss is a bigger share of the smaller margin, and the cushion before liquidation shrinks. At 20x, the margin is exactly the $100 you meant to risk, so there is no room for slippage or fees at all.

A sensible order of operations:

1. Find the stop on the chart, below structure.
2. Work out the position size from your risk percentage.
3. Choose the lowest leverage that comfortably funds that position, so liquidation sits far beyond the stop.
4. Check the exchange's displayed liquidation price against your stop.

Do not do it in the opposite order, by picking a leverage and then adding to the position until the margin looks big. A classic blow-up looks like this: the whole $10,000 account goes in as margin at 10x, a $100,000 position. A 9.5% fall liquidates it, and the entire account is gone on one idea.

The psychology of leverage

Leverage changes behaviour as much as it changes arithmetic.

• Everything feels urgent. A 2% move against a 20x position is a 40% hit to the margin. Small moves feel catastrophic, so people close winners early and move stops, which breaks the plan.
• Adding to a loser. When a leveraged position drops towards liquidation, the pull is to add margin or size to move the liquidation price away. That is how a small, controlled loss becomes a large one. If the idea is wrong, the stop was the answer.
• Revenge trading. After a liquidation, the instinct is to re-enter at higher leverage to win it back. Losses compound against you, and a drawdown of 50% needs a 100% gain to recover.
• Winning teaches the wrong lesson. A few big wins at high leverage can feel like skill when they are partly the lever. A single liquidation can undo many of them.

High leverage is a common way for newer traders to lose a whole stake quickly. If you are not yet consistently managing risk on spot positions, leverage is more likely to amplify the mistakes than the skill.

How to use the liquidation calculator on CoinSeekly

The liquidation calculator applies the isolated-margin formula above. Pick the direction, then enter your entry price, leverage, margin and maintenance margin, plus an optional stop. It returns:

• the liquidation price and how far it is from entry as a percentage,
• the position size your margin controls at that leverage,
• the move that wipes out the margin before the maintenance floor,
• the loss if your stop is hit, as a share of margin, and a warning when the stop is beyond liquidation.

Pair it with the position size calculator to get the units first and then see what margin and liquidation distance each leverage setting implies. To find candidate levels for a stop, the near-support list ranks coins by distance to their nearest support, which in the product is a mechanical swing low from daily candles. It is a starting point to check by eye, not a guarantee.

CoinSeekly does not track leverage, liquidation levels, open interest or funding rates, and the calculator is a model rather than a quote from your exchange.

The bottom line

Leverage is a multiplier on both gains and losses. Liquidation arrives when a move of about 1/leverage minus the maintenance margin goes against you: 9.5% at 10x, 4.5% at 20x, 0.5% at 100x, on the simple formula. Crypto's ordinary swings can exceed the high-leverage rows in a day, exchange numbers will differ from the model, and funding quietly charges you for holding.

The safe habit is the one from the beginning: decide your risk in money, place the stop where the idea fails, size the position from that, and then use the least leverage that funds it, with liquidation far beyond the stop. Run the numbers in the liquidation calculator, read the position sizing and stop-loss guide, and use the swing trading guide to see how entries, stops and targets fit together. If you are exploring the topic for the first time, the glossary defines the terms used here.