◎ Level 3 · Intermediate Derivatives & Leverage Margin and Liquidation

Liquidation Price

Understand crypto liquidation price: maintenance margin, mark-price triggers, bankruptcy price, fees, funding, cross-position effects and formula limitations.

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DERIVATIVES & LEVERAGE · MARGIN AND LIQUIDATION

Liquidation price is the venue-calculated reference level at which available margin is no longer sufficient under maintenance requirements and the liquidation process can begin. It is not simply entry price minus “one divided by leverage”.

Learning objective: understand the mechanism, its payoff or margin effect, and the risks that matter in real crypto derivatives markets.Last reviewed: 21 August 2026

Risk first. A displayed liquidation price is conditional on current margin, position size, maintenance tier, funding, fees, collateral and other positions. It can move before the market reaches it, and actual liquidation execution can be worse than the trigger level.

Liquidation condition
What moves it
Trigger vs execution
Worked example
Mistakes
Checkpoint
FAQ

The maintenance-margin condition

At a high level, liquidation begins when account/position equity falls to the venue’s maintenance requirement plus applicable buffers. A simplified conceptual relationship is:

margin equity ≤ maintenance requirement → liquidation process may begin

Exact definitions differ. For linear versus inverse contracts, isolated versus cross margin and portfolio-margin systems, the mathematics can be materially different.

Variables that can change liquidation price

entry price and position direction;
position size/notional and maintenance-margin tier;
allocated or shared collateral;
funding payments and trading fees;
mark-price methodology;
other positions and unrealised P&L under cross margin;
collateral haircuts or collateral price changes;
manual margin additions/removals.

Practical rule: use the venue’s live liquidation estimate and published formula. A generic calculator is educational only unless it exactly reproduces the venue contract and current risk tier.

Liquidation price, bankruptcy price and execution are different

The liquidation trigger is normally the level at which the venue takes control/reduces the position. The bankruptcy price is a separate risk-engine concept associated with exhausting the trader’s margin. Actual liquidation orders then interact with the market.

In volatile or illiquid conditions, execution can be worse than the trigger. Insurance funds and, in extreme cases, ADL mechanisms may handle deficits according to venue rules.

Worked example: simplified isolated case

Assume a linear long with entry notional equivalent to 1 BTC at £80,000. Allocated collateral is £20,000. Suppose, purely for illustration, the venue requires £5,000 of maintenance margin and ignore fees/funding.

Only £15,000 of loss can occur before equity reaches that £5,000 maintenance threshold. A £15,000 adverse move from £80,000 implies a simplified threshold around £65,000.

This is not a universal liquidation formula. Real venues may use percentage maintenance tiers, mark price, contract multipliers, additional fees and nonlinear/inverse P&L. The example only shows why liquidation can occur before collateral is fully exhausted.

Stress-testing principle: do not manage a leveraged position to the displayed liquidation price. A risk plan should sit materially inside that boundary because spreads can widen, mark and last prices can diverge, fees can accumulate and liquidation controls can activate before discretionary exits are possible.

For cross-margin accounts, a useful stress test is to shock several positions and collateral assets together. A liquidation estimate based on today’s portfolio can move sharply if another position loses value or if a collateral haircut increases. This is why liquidation distance should be treated as a dynamic account metric rather than a fixed stop level.

Common mistakes and misunderstandings

Using 1/leverage as an exact liquidation percentage.
Assuming last trade, not mark price, triggers liquidation.
Treating liquidation and bankruptcy prices as synonyms.
Ignoring funding and fees that gradually move the threshold.
Assuming the displayed estimate cannot change while the position is open.

Knowledge checkpoint

Q1. Why can liquidation occur before position collateral reaches zero?

Q2. Which variables can move liquidation price without changing entry price?

Q3. Why should mark price and last trade be distinguished?

Q4. Why is a liquidation trigger not the same as the final liquidation fill?

FAQ

❓ Is liquidation price fixed when I open the trade?

Not necessarily. Funding, fees, collateral changes, maintenance tiers and other positions can move it.

❓ Does 5× leverage mean liquidation exactly 20% away?

No. Maintenance margin and venue-specific formulas make that shortcut inaccurate.

❓ What price triggers liquidation?

Many venues use a mark price, but you must verify the contract’s actual rule.

❓ Is bankruptcy price the same as liquidation price?

No. They are distinct risk-engine concepts; venues usually intervene before margin is fully exhausted.

Summary

Liquidation is triggered by a maintenance-margin shortfall under venue rules.
The threshold depends on more than entry and leverage.
Mark price, liquidation trigger, bankruptcy price and execution price are distinct.
Generic formulas should not replace the venue’s live risk calculation.

Use this lesson as one component of a wider risk and execution process. Derivative specifications, margin formulas, settlement and loss-allocation rules can differ substantially between venues.

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