In the fast-paced world of cryptocurrency futures trading, managing risk is paramount. One of the most critical concepts every trader must understand is liquidation—a mechanism designed to prevent losses from exceeding available margin. This guide explains what liquidation is, how it works, how to calculate key thresholds, and most importantly, how to avoid it.
What Triggers Liquidation?
Liquidation occurs when your margin balance falls to or below the required maintenance margin level. To protect traders and the platform from negative balances, each futures contract enforces a minimum margin threshold known as the maintenance margin.
If your equity can no longer cover this requirement due to adverse price movements, the system automatically closes your position to prevent further losses. This safety measure ensures you won’t lose more than your deposited margin.
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What Happens During Liquidation?
When liquidation is triggered, the system takes control of your position and remaining margin. Here's the sequence:
- The platform attempts to close your position at the bankruptcy price—the theoretical price at which your entire margin would be lost.
- If market conditions prevent execution at that price, BTSE uses its Futures Insurance Fund to adjust the order price slightly, improving the chance of a successful close.
- In extreme volatility or illiquid markets, if the insurance fund isn’t enough, the Auto-Deleveraging (ADL) mechanism activates. ADL matches your position with opposing traders based on their leverage and profit levels, gradually reducing both sides’ positions until yours is fully closed.
This layered approach minimizes systemic risk and protects the integrity of the market.
How Is Liquidation Price Determined?
Your position displays a real-time liquidation price, calculated based on:
- Entry price
- Leverage used
- Maintenance margin rate
- Current mark price
- Fees and funding rates
Liquidation occurs when the mark price—a fair-value price derived from multiple exchanges—reaches or crosses your liquidation price. Using mark price instead of last traded price prevents manipulation and avoids unnecessary liquidations during short-term spikes.
For long positions:
As the mark price drops toward your liquidation level, risk increases.
For short positions:
As the mark price rises toward your liquidation level, danger looms.
Staying aware of this dynamic helps you act before it’s too late.
How to Avoid Liquidation
Avoiding forced closure isn’t just about luck—it’s about strategy and discipline. Consider these proven methods:
1. Choose Appropriate Leverage
Higher leverage amplifies both gains and risks. For example:
- BTC contracts may require only 0.5% maintenance margin
- USDT-margined contracts might demand 4.5%
Using maximum leverage (e.g., 100x) means even a 1% move against you could trigger liquidation. Opt for lower leverage—like 5x or 10x—to give your trades breathing room.
2. Monitor and Top Up Margin
If the mark price approaches your liquidation level, consider adding more funds to your futures wallet. Increasing your margin balance pushes the liquidation price further away, giving you more resilience against volatility.
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3. Set Stop-Loss Orders
Predefine your acceptable loss by setting stop-loss orders. These allow you to exit manually before reaching the liquidation point, maintaining control over your exit strategy and preserving capital.
4. Limit Risk Capital
Only allocate what you're willing to lose. After a profitable trade, withdraw excess funds from your futures wallet. For instance:
- Earn $1,000 profit
- Reinvest only $500
- Transfer the rest to spot or withdrawal wallets
This prevents unintended use of surplus funds as margin during downturns.
Calculating Initial and Maintenance Margin
Understanding margin calculations empowers smarter trading decisions.
Initial Margin Formula
Initial Margin = Notional Value × Initial Margin %
Where:
Notional Value = Mark Price × Position Size × Contract Multiplier
Example: BTC Perpetual Contract
- Mark Price: $9,001
- Position Size: 100 contracts
- Contract Multiplier: 0.001 BTC
- Initial Margin Rate: 1%
Notional Value = 9,001 × 100 × 0.001 = $900.10
Initial Margin = $900.10 × 1% = **$9.001**
Maintenance Margin Formula
Maintenance Margin = Notional Value × Maintenance Margin %
Example:
- Mark Price: $8,800
- Same position details
- Maintenance Margin Rate: 0.5%
Notional Value = 8,800 × 100 × 0.001 = $880
Maintenance Margin = $880 × 0.5% = **$4.40**
You must maintain at least $4.40 in equity to keep this position open.
Estimating Your Liquidation Price
The exact formula varies by platform, but here’s a general breakdown:
For Long Positions:
Liquidation Price = Entry Price − (Total Loss Capacity / (Position Size × Contract Multiplier))
Where:
Total Loss Capacity = Available Balance + Unrealized PnL − Maintenance Margin − Taker Fee − Funding Fee
Practical Example:
- Position Size: 1,000 contracts (long)
- Contract Multiplier: 0.001
- Entry Price: $60,000
- Mark Price: $59,000
- Maintenance Margin Rate: 0.5%
- Taker Fee: 0.06%
- Funding Rate: 0.01%
- Available Balance: $3,000
Step 1: Calculate Total Loss Capacity
= 3,000 + ((59,000 − 60,000) × 1,000 × 0.001)
− (59,000 × 1,000 × 0.001 × 0.5%)
− (59,000 × 1,000 × 0.001 × 0.06%)
− (59,000 × 1,000 × 0.001 × 0.01%)
= $1,663.7
Step 2: Per-Coin Loss Capacity
= 1,663.7 / (1,000 × 0.001) = $1,663.7
Step 3: Liquidation Price
= 60,000 − 1,663.7 = $58,336.3
Your position will be liquidated if the mark price reaches or drops below $58,336.3.
Risk Tolerance Across Leverage Levels
| Scenario | Risk Buffer |
|---|---|
| 1x Leverage (Full Margin) | ~99.5% drop tolerated |
| 10x Leverage | ~9.5% buffer |
| 100x Leverage | < 1% buffer |
High leverage drastically reduces your margin for error. A mere <1% adverse move can wipe out a 100x leveraged position.
Lower leverage offers greater stability and peace of mind—especially in volatile markets.
Frequently Asked Questions (FAQ)
What is maintenance margin?
It’s the minimum equity required to keep a futures position open. Falling below this level triggers liquidation.
Can I recover funds after liquidation?
Typically not—the process closes your position to prevent further loss. Any remaining value may go toward the insurance fund.
Does using isolated margin reduce liquidation risk?
Yes. Isolated margin limits risk to a defined amount per trade, unlike cross-margin where all funds are at risk.
What is ADL and when does it happen?
Auto-Deleveraging kicks in when insurance funds are exhausted. It forces profitable opposite traders to absorb part of your position.
How accurate is the displayed liquidation price?
It’s an estimate based on current rates and fees. Sudden volatility or fee changes may shift it slightly.
Can I avoid liquidation entirely?
Not guaranteed—but proper leverage use, stop-losses, and active monitoring greatly reduce the likelihood.
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Core Keywords
futures trading, liquidation price, maintenance margin, initial margin, leverage trading, crypto derivatives, mark price, stop-loss strategy
By understanding these mechanisms and applying disciplined risk management, traders can navigate futures markets safely and sustainably—maximizing opportunities while minimizing exposure to forced exits.