Liquidations on Cryptocurrency Exchanges: Why They Happen and How to Protect Yourself

Cryptocurrency volatility is a double-edged sword. On one hand, it creates opportunities for profit; on the other, it generates serious risks. The most dangerous for traders working with leverage is liquidation of positions. This is not just a loss of part of your funds. It is an automatic closing of your trade by the exchange without your consent, which can leave you with an empty account.

Why is liquidation the main threat in margin trading

When trading with leverage, you borrow funds from the exchange to increase your position size. In return, you need to provide collateral — the initial margin. It sounds attractive: small price fluctuations can bring significant profits. But there is a serious catch.

If the market moves in the opposite direction, your collateral will start to decrease. When its size falls below the set limit, a margin call occurs — the exchange requires you to top up your account. If you do not do this or simply do not have time, the position will be liquidated. All your assets will be sold at the market price to cover losses. Sadly, this is how the system’s safety mechanism is designed.

Liquidations on exchanges happen automatically, without warnings and without the possibility to cancel the order. Moreover, the exchange charges an additional fee for the liquidation process itself, increasing your losses.

Two types of liquidation: which one hurts more?

There are partial and full liquidation. Partial liquidation closes only part of the position — usually a trader’s voluntary decision to reduce risk and preserve some assets. Full liquidation is a more severe scenario. Here, all assets are sold, and the trader loses the entire initial deposit, and sometimes the account goes into negative balance.

Sometimes losses are so large that the exchange is forced to cover them from insurance funds. This happens rarely, but such situations demonstrate how serious the consequences of liquidation can be.

What determines the liquidation price?

The liquidation price is the level at which the exchange will automatically close your position. It cannot be avoided, but it can be predicted. Factors influencing it include:

• leverage size (the higher — the closer the liquidation price to the entry price);
• current cryptocurrency price;
• remaining funds in the account;
• the level of maintenance margin on a specific exchange.

For example, if you open a long position in Bitcoin with 5x leverage, the liquidation price will be much closer to your entry price than with 2x leverage.

How to protect yourself: two proven methods

Good news: liquidation can be avoided if you are more attentive.

First rule — determine your risk percentage. Professionals recommend risking a maximum of 1–3% of your trading balance on a single trade. This means that even if you lose 100 trades in a row (which is practically impossible in the crypto industry), you will not lose everything. Most traders start exactly here — with a clear understanding of how much they are willing to lose.

Second rule — always use a stop-loss. This tool automatically closes your position when a certain price is reached, reducing losses. A good rule is to set a stop-loss 2% below the entry price. If the market suddenly turns, you will lose very little instead of waiting for forced liquidation and a full deposit loss.

Why even experienced traders get caught

The cryptocurrency market moves at a speed that is hard to predict. Prices can plummet by 20% in a few minutes. Even if you have calculated everything correctly, a sudden spike in volatility can lead to liquidation before you have time to react.

Moreover, many traders neglect risk management, thinking they can “recover” after a loss. This is a mistake. Margin trading requires discipline and a clear plan for when the market goes against your expectations.

Liquidation is not fate, but a result of choice

The danger of liquidation is real, but it is not inevitable. Traders who understand how it works, set their risk percentage, and use stop-losses stay in the game. Those who neglect these rules lose funds.

Remember: in the cryptocurrency market, volatility is not a bug but a feature. You just need to learn how to work with it.

Frequently Asked Questions

What happens during liquidation of a position?
Your assets are automatically sold at market price to cover losses and repay borrowed funds from the exchange. The exchange also charges a fee for the process itself.

Can the account go into negative after liquidation?
Yes, if losses exceed your initial margin. In such cases, the exchange’s insurance fund usually covers the difference.

How often do liquidations occur in the market?
During high volatility, liquidations happen constantly. Bitcoin and other crypto assets often experience sharp fluctuations, so the risk remains always present in margin trading.

Can I save my position after a margin call?
Yes, if you have time and funds. Deposit to your account, and the position will remain open. The key is to do this quickly before the price drops even further.

What leverage size should I choose to avoid liquidation?
The lower the leverage, the further the liquidation price from your entry point. Beginners are recommended to start with 2x or 3x leverage, rather than 10x or higher.