What are crypto liquidations? Learn

What a liquidation is

Futures let traders open positions larger than their deposit. A trader with $1,000 of margin at 10× leverage controls a $10,000 position. The exchange keeps that position open only while the margin covers its losses. When the price moves far enough against the trader that the remaining margin drops below the maintenance margin, the exchange closes the position by force. That forced close is a liquidation, and the price where it happens is the liquidation price.

The higher the leverage, the closer the liquidation price sits to the entry: at 10× it is roughly 10% away, at 50× only about 2%. Fees and the maintenance margin bring it a little closer still.

Long and short liquidations

• A long liquidation is a forced sell. The trader bet on a rise, the price fell, and the exchange sells the position into the market.
• A short liquidation is a forced buy. The trader bet on a fall, the price rose, and the exchange buys the position back.

Forced orders are market orders: they do not wait for a good price. On a coin with a thin order book a single large liquidation can move the price by itself.

Cascades and squeezes

Liquidations feed on themselves. Forced selling pushes the price down, the lower price reaches the liquidation prices of more longs, and their forced selling pushes it lower again. The same happens upwards with shorts — a short squeeze. This is why the sharpest candles in crypto are so often liquidation cascades: the move stops when the crowded side has been cleared out, not when the news is digested.

How to read liquidation data

• Size against the coin. $500,000 of liquidations is noise on BTC and a major event on a small coin. Compare with the coin's usual volume and open interest.
• Which side was flushed. A wave of long liquidations into a sharp drop often marks the moment when weak hands are forced out — sometimes close to a local low. Short liquidations in a rally often mark its most violent part.
• Liquidations and open interest together. A cascade removes positions, so open interest usually falls at the same time. Liquidations while open interest keeps rising mean new leverage is replacing the old.
• Clusters, not single prints. One large liquidation says little; several on the same coin within minutes show a crowded side being cleared.

Limits to keep in mind

Liquidation data is a picture of forced flow, not a forecast. A cascade can continue far beyond the point where it looks finished. Public liquidation feeds are also incomplete: the stream we read reports at most one liquidation per contract per second, so during a real cascade the true total is higher than any public number, ours included.