Crypto glossary
Liquidation price
The liquidation price is the level at which an exchange forcibly closes a leveraged position because its margin no longer covers the maintenance requirement.
When a trader opens a leveraged position, the exchange calculates the price at which the remaining margin would fall to the maintenance margin requirement. That is the liquidation price. For a long it sits below the entry, for a short above it, and the higher the leverage the closer it is: at 10x a long is liquidated after a fall of roughly 9 to 10 percent, at 50x after about 2 percent.
Exchanges compare the liquidation price with the mark price rather than the last trade. Once reached, the liquidation engine takes over the position and closes it, and any margin left after fees usually goes to the insurance fund. Large clusters of liquidation prices near the same level are tracked on heatmaps because they can accelerate moves when triggered.
Adding margin pushes the liquidation price further away, and with cross margin the whole account balance can be used, which delays liquidation but puts every position at risk. Fees, funding payments and price gaps can bring liquidation forward, so traders rarely wait for it and set stop-losses well before.
Example
A trader opens a 20x long on ether at 3,000 dollars with isolated margin; the exchange shows a liquidation price near 2,870 dollars, so a fall of just over 4 percent would close the trade.