This article explains liquidation in crypto futures, including how it works, how the liquidation price is calculated, the role of maintenance margin, and the difference between the mark and last-traded price. It also outlines practical risk management strategies to reduce the probability of liquidation.

TL;DR

• Liquidation occurs when the margin falls to the maintenance level.
• It is triggered by the mark price, not the last traded price.
• Higher leverage increases liquidation risk.
• Maintenance margin depends on position size.
• Stop losses, lower leverage, and added margin reduce risk.

Understanding Liquidation in Crypto Futures

Liquidation in crypto futures is the automatic closing of a trader’s position when their losses exceed the margin they have deposited. It happens when the market moves sharply against a leveraged trade, reducing the trader’s available funds below the required level.

In this blog, you will learn how liquidation works, why it occurs, and how traders can manage liquidation risk.

Mechanics of Liquidation in Crypto Futures

Liquidation occurs when a trader’s margin can no longer support their leveraged futures position. To open a trade, a trader deposits an initial margin (collateral) with the exchange.

If the market moves against the position, unrealised losses reduce this margin. When it falls below the required maintenance level, the exchange automatically closes the position to prevent further losses.

Let’s understand this with the help of an example:

A trader deposits ₹10,000 as initial margin.
The maintenance margin required is ₹2,000.
Using 10x leverage, they open a ₹1,00,000 long position.
If the market falls by around 8%, the loss is ₹8,000.
The remaining margin becomes ₹2,000, which equals the maintenance margin.

At this point, the exchange liquidates the position to prevent further losses.

What is The Liquidation Price? How Is It Determined?

Liquidation price is the specific price level at which a leveraged futures position is automatically closed by the exchange because the trader’s remaining margin has fallen to the maintenance margin requirement. It represents the maximum adverse price movement a trader can sustain before their position is forcefully exited.

In crypto futures trading, liquidation is typically triggered by the mark price (a fair reference price set by the exchange), not the last traded price, to prevent unnecessary liquidations from short-term price spikes.

How Is Liquidation Price Calculated?

Initial Margin = ₹10,000
Maintenance Margin = ₹2,000
Leverage = 10x
Position Size = ₹1,00,000
Entry Price = ₹1,00,000

Maximum Loss Before Liquidation:

Maximum Allowable Loss = Initial Margin − Maintenance Margin
= ₹10,000 − ₹2,000
= ₹8,000

Liquidation Price Formula (Long Position):

Liquidation Price = Entry Price − Maximum Allowable Loss
= ₹1,00,000 − ₹8,000 = ₹92,000

If the mark price falls to approximately ₹92,000, the position is liquidated.

Since liquidation is linked to the mark price, understanding how it differs from the last traded price is essential.

Mark Price Vs Last Traded Price

What is The Maintenance Margin? And Its Role in Liquidation?

Maintenance margin is the minimum amount of funds a trader must maintain in their crypto futures account to keep a leveraged position open. It acts as a safety buffer for the exchange and defines the threshold at which liquidation is triggered. When market losses reduce the trader’s remaining margin to the maintenance level, the exchange automatically closes the position to prevent further losses.

Maintenance margin is usually calculated as a percentage of the total position size. This means larger positions require a higher maintenance margin.

Here’s a quick example to understand this better:

Position Size = ₹2,00,000
Maintenance Margin Requirement = 1%
Required Maintenance Margin = ₹2,000

If the trader’s available margin falls to ₹2,000 due to losses, the position is liquidated.

Relation Between Maintenance Margin and Position Size

Maintenance margin is directly proportional to position size because it is usually calculated as a percentage of the total contract value. As the position size increases, the absolute maintenance requirement also increases.

For example:

If the maintenance margin requirement is 1%
A ₹1,00,000 position requires ₹1,000 as maintenance margin
A ₹5,00,000 position requires ₹5,000 as maintenance margin

This means larger positions require more capital to remain open. Since leverage allows traders to control larger positions with limited margin, even small adverse price movements can quickly reduce available margin. As a result, larger positions are more likely to reach the liquidation threshold if the market moves unfavourably.

Key Strategies to Avoid Liquidation

#1 Strategic Use of Stop Loss Orders

A stop loss placed meaningfully above the liquidation price is the most effective risk-control mechanism. It allows the trader to exit the position before forced closure.

Example: If a long position is entered at ₹1,00,000 and the liquidation price is ₹92,000, placing a stop loss at ₹95,000 limits downside exposure and ensures an orderly exit before the margin threshold is breached.

#2 Optimising Leverage Exposure

Lower leverage increases the buffer between the entry price and the liquidation price by reducing effective position size relative to margin.

Example: With a ₹10,000 margin, 20x leverage creates a ₹2,00,000 position, making the liquidation level highly sensitive to price movement. At 5x leverage, the position size reduces to ₹50,000, significantly widening the liquidation buffer.

#3 Active Margin Management

Adding margin lowers effective leverage and strengthens the position’s ability to withstand volatility.

Example: Increasing the margin from ₹10,000 to ₹15,000 on an open position reduces liquidation risk by moving the liquidation price further away from the entry level.

Final Thoughts

Liquidation in crypto futures is driven by clear mathematical thresholds — margin, maintenance requirements, and mark price movements. By understanding how liquidation price is calculated and how leverage impacts risk, traders can make informed decisions. Effective position sizing and margin management remain central to long-term participation in futures markets.

Advice for Beginners

For those new to crypto futures, treat leverage with caution and prioritise capital preservation over aggressive position sizing. Start with lower leverage, monitor your liquidation price before entering a trade, and always define a stop loss in advance. Understanding your maximum potential loss is more important than estimating potential profit in futures trading.

Frequently Asked Questions