Crypto Liquidation: How Exchanges Close a Position

Every leveraged position is backed by margin. The CFTC's futures glossary defines maintenance margin as the minimum equity that must stay in the account at all times. Regulated futures brokers issue a margin call when equity falls to that level. Most crypto exchanges skip the call: when your margin can no longer cover the maintenance requirement, their liquidation engine closes the position for you.

Binance's liquidation rules describe the trigger in those terms: liquidation happens when collateral, meaning initial margin plus realized and unrealized profit and loss, falls below the maintenance margin. The exchange shows this as a margin ratio; at 100% the position is liquidated.

This guide follows the steps on the exchange side. If you want to know how far price can move before a given leverage is closed out, start with leverage and liquidation.

Exchanges use the mark price, not the last traded price. Binance describes its mark price as a blend of funding data and prices from several spot exchanges, and states that the last price only affects realized profit and loss. The aim is to stop a single sharp trade on one order book from liquidating positions that the wider market would not.

Two consequences follow. First, a wick on the last-price chart does not always mean positions were liquidated at that level. Second, in very fast markets the actual fill can be worse than the calculated liquidation price. Binance's own example describes a short with a calculated liquidation price of 17,006 USDT that was closed at 17,100 USDT after a sudden jump.

Each exchange publishes its own formula and tiered maintenance margin rates: larger positions need a higher rate. The shape of the calculation is the same everywhere, and a simplified example shows the moving parts.

• Illustrative example, isolated margin: a long of 0.1 BTC at 80,000 USDT with 10x leverage posts 800 USDT of margin.
• With a 0.5% maintenance margin rate, liquidation comes where 800 + 0.1 × (P − 80,000) = 0.1 × P × 0.005. Solving gives P ≈ 72,362 USDT, about 9.5% below entry.
• The bankruptcy price, where the margin would be exactly zero, is 80,000 × (1 − 1 ÷ 10) = 72,000 USDT.
• The gap between the two, about 362 USDT per bitcoin or 36 USDT on this position, is the buffer the exchange uses to close the position and pay the liquidation fee.
• The same long at 20x posts 400 USDT. Liquidation then comes near 76,382 USDT, only about 4.5% below entry, with the bankruptcy price at 76,000 USDT.

Fees and funding move the real figure slightly, so always read the liquidation price the exchange shows on the position itself.

Binance calls its process Smart Liquidation, and its published steps are a useful model of how most venues work:

• Open orders are cancelled: all of them in cross margin, or those on the same contract in isolated margin.
• The engine tries to reduce the position with a large immediate-or-cancel order. If what remains is again above the maintenance requirement after losses and the clearance fee, liquidation stops there.
• Whatever cannot be closed becomes a bankrupt position, which is handed to the insurance fund.
• A liquidation clearance fee is charged on the notional value of a liquidated position, unless it went bankrupt. The rate is set in the exchange's trading rules.

The insurance fund is the exchange's buffer against losses that exceed a trader's margin. According to Binance, it takes over bankrupt positions at the bankruptcy price, absorbs their losses and keeps any profit from closing them better than that. In volatile markets it may take over liquidated positions directly.

The fund grows when liquidations are closed at prices better than bankruptcy, which is where the buffer in the example above goes. It shrinks when a market gaps through many bankruptcy prices at once. That is why insurance fund balances are watched as a measure of how much stress a venue can absorb.

Auto-deleveraging is the last step, used when the insurance fund cannot cover a bankrupt position. The matching engine closes the bankrupt position against traders on the other side who did nothing wrong.

Bybit's description shows how the counterparties are chosen. Opposing positions are ranked by leveraged return, with profitable, highly leveraged positions first. Traders can see their place in the queue as indicator lights on the positions tab. The selected positions are closed at the bankrupt position's bankruptcy price, the trader whose liquidation caused it pays a taker fee, and the reduced counterparties pay a maker fee. Their open orders are cancelled, and they are notified.

For a profitable trader, ADL means a winning position can be cut short during an extreme move, at a price they did not choose. It is rare, but it is part of the contract terms.

Forced closes are market orders, so they cluster in fast moves and can push price further into the next set of liquidation prices. On Coinlytic's data, a cascade usually appears as a long candle, a spike in reported liquidations on one side and a sudden fall in open interest. Funding often moves back towards neutral afterwards because the crowded side has been cleared.

The direction of a cascade can also flip within hours. A drop that forces out crowded longs can leave short sellers exposed if price rebounds, and the next wave of forced closes then comes from the other side.

Reported liquidation totals are estimates. Exchanges publish them differently and some feeds sample orders, so compare numbers only within one source. Our guide to funding, open interest and liquidations shows how to read the three together.

• Place the stop well before the liquidation price, so that you decide the exit and not the engine. The position sizing guide shows how to size from the stop.
• Use lower leverage: the same move consumes a smaller share of the margin.
• Check the maintenance margin tier for your position size; a larger position can carry a higher rate and a closer liquidation price.
• Remember that funding paid from isolated margin moves the liquidation price closer over time.
• In cross margin, a loss on one position can pull others towards liquidation, because they share the same balance.

• Binance: Futures liquidation protocols, insurance fund and ADL
• Bybit Help Center: Auto-Deleveraging (ADL) mechanism
• CFTC: Futures glossary (maintenance margin, leverage)
• CFTC: Customer Advisory, Understand the Risks of Virtual Currency Trading