Liquidation: what it is and how a cascade starts

A liquidation is what happens when a leveraged position has lost so much that the margin behind it no longer covers the exchange's minimum. At that point the exchange stops waiting for you to decide: its liquidation engine closes the position for you, at market, and usually keeps part of what is left. This page explains where that line sits, what moves it, what happens when the closing price is worse than the margin can cover, and how one forced sale can set off the next.

The two margins: initial and maintenance

Every leveraged position has two margin numbers, and they do different jobs.

• Initial margin is what you post to open the position. On Hyperliquid, for example, the margin required to open is the position size times the mark price, divided by the leverage you chose. A $10,000 position at 10x needs $1,000.
• Maintenance margin is the floor. As long as your equity on the position (margin plus unrealised profit or loss) stays above it, the position stays open. When equity falls below it, the position is liquidated.

The maintenance margin is much smaller than the initial margin. Hyperliquid sets it at half of the initial margin at the asset's maximum leverage, which puts it between 1.25% of the position value (for assets that allow 40x) and 16.7% (for assets capped at 3x). Other exchanges use tiers: the bigger the position, the higher the maintenance rate.

The gap between what you posted and that floor is your room. Leverage decides how big that room is.

How the liquidation price is set

The liquidation price is simply the price at which your equity hits the maintenance floor. Exchanges publish the formula. Hyperliquid's version for a single position is:

liq_price = price − side × margin_available / position_size / (1 − l × side)

where side is 1 for a long and −1 for a short, margin_available is your margin minus the maintenance requirement, and l is the maintenance rate. dYdX publishes the same idea in a different form, built from your equity, the position size and the maintenance margin fraction.

Here is what that gives for a $10,000 long on an asset with a 1.25% maintenance rate, so a $125 floor, at three leverage settings. Fees and funding are left out to keep the arithmetic clean.

The pattern is the point. Doubling the leverage does not halve the room; it removes more than half of it, because the floor stays put while your margin shrinks. A move that is ordinary for a crypto asset in a busy week can be enough at 20x.

Two things make the real number worse than this table:

• Fees and funding come out of the same margin. A long that pays funding every few hours slowly moves its own liquidation price closer.
• The floor can be higher than you think. Large positions sit in higher maintenance tiers, so the same leverage on a bigger position leaves less room.

How much of your account goes into one position, and where your stop sits, is a separate question with its own rules: see our guide to position sizing. Whether a loss stays inside one position or can reach the rest of your balance depends on the margin mode, which we cover in cross margin vs isolated margin.

Mark price, not the last trade

Liquidations are not triggered by the last traded price on the exchange's own book. They use a mark price, a reference built from several sources. Binance says it uses the mark price "to prevent unnecessary liquidations and discourage market manipulations by bad actors". Hyperliquid's mark price combines external exchange prices with its own book state.

This matters in two ways. A brief wick on one venue does not, by itself, liquidate you. But the reverse is also true: you can be liquidated while the last price on your screen still looks safe, because the mark price has already crossed your line.

What happens when you are liquidated

The details vary by venue, but the sequence is similar.

1. The engine tries the order book first. Hyperliquid sends market orders for the position to the book. For positions larger than 100k USDC, only 20% is sent at first, followed by a short cooldown, so one huge order does not clear the book in a single sweep.
2. You usually lose more than the gap to the floor. On dYdX, a liquidated account can pay a penalty of up to 1.5% into an insurance fund. On Hyperliquid, if equity drops below two thirds of the maintenance margin before the book can absorb the position, it is taken over by a backstop vault and the maintenance margin is not returned.
3. If the book cannot absorb it, the insurance fund steps in. An insurance fund is a pool the exchange keeps to cover positions closed at a worse price than their margin can pay for.
4. If the insurance fund cannot, profitable traders on the other side are cut. This is auto-deleveraging (ADL). Binance describes ADL as "the final step in the liquidation process", which happens only if the insurance fund cannot take on a bankrupt position. Traders who were winning can see their positions reduced without asking.

The practical lesson is that the liquidation price is not a stop. A stop-loss order is something you place, at a level you choose, while your margin is still yours. A liquidation is the exchange closing the position after your margin is mostly gone.

How a cascade starts

One liquidation is a private event. Many at once move the market. The mechanism is described plainly in a 2026 study of seven large bitcoin liquidation cascades: positions are leveraged, an adverse move crosses maintenance-margin thresholds, the liquidation engine sends forced, price-insensitive sell orders, and their market impact pushes the price further, into the next thresholds.

Each step feeds the next:

Three conditions make a cascade more likely:

• Crowded leverage on one side. A long stretch of high funding is one way to see it, because it shows how many traders are paying to stay long with leverage.
• Thin liquidity. Weekends, late hours and smaller coins have fewer resting orders to absorb forced selling.
• A sudden trigger. The same study separates cascades that build up slowly from those set off by abrupt news, and finds the second kind gives little warning in the price beforehand.

The largest example on record is the sell-off of October 10, 2025, which we break down in what a sharp 24-hour drop actually tells you.

How to keep a liquidation from happening to you

• Know your liquidation price before you open. Every exchange shows it on the order screen. Write it down next to your stop.
• Use less leverage than the maximum. The table above shows how fast room disappears as leverage rises.
• Set a stop that sits well before the liquidation price. A stop you choose costs less than a liquidation the engine chooses.
• Watch the costs that eat margin. Funding and fees move the line while you hold.
• Remember the mark price. The line is checked against the mark, not the last trade you see.

FAQ

What does liquidation mean in crypto?

It means the exchange has closed your leveraged position because your equity fell below the maintenance margin. The engine sells (or buys back, for a short) at market, and you usually lose most or all of the margin you posted for that position.

How is the liquidation price calculated?

It is the price at which your equity on the position equals the maintenance margin. Exchanges publish the formula; it depends on the entry price, the size, your margin and the maintenance rate. Higher leverage puts it closer to your entry.

What is the difference between initial and maintenance margin?

Initial margin is what you post to open the position. Maintenance margin is the smaller minimum you must keep to stay open. The gap between the two is the room your position has before it is liquidated.

What is auto-deleveraging?

It is the last step when a liquidated position cannot be closed within its margin and the insurance fund cannot cover the shortfall. The exchange reduces the positions of profitable traders on the other side to close the gap.

What is a liquidation cascade?

It is a chain reaction. Forced orders from the first liquidations move the price into the next traders' liquidation levels, which fire more forced orders. It is most likely when leverage is crowded on one side and liquidity is thin.