1. What Is Liquidation in Crypto Futures?
Liquidation is the forced closure of your leveraged position by the exchange when your margin balance falls below the required maintenance level. In simple terms: you borrowed money to trade, the market moved against you, and the exchange closed your position to prevent further losses.
Unlike spot trading, where you can hold through a drawdown indefinitely, futures trading has a hard limit. When your position's unrealized losses eat through your initial margin and approach the maintenance margin threshold, the exchange's liquidation engine triggers. Your position is closed at market price, and your remaining margin is returned to you, minus any losses.
The liquidation price is the specific price level at which this forced closure occurs. It is determined by three variables: your entry price, your leverage, and the exchange's maintenance margin rate (MMR). Understanding how these interact is essential for any futures trader.
2. The Liquidation Price Formula
The first step is identifying your maintenance margin rate (MMR). This is the minimum percentage of your position value that must remain as margin at all times. If your margin drops to this level, liquidation occurs. MMR varies by exchange, trading pair, and sometimes leverage tier.
The second step is calculating your initial margin. This is simply your position value divided by leverage. If you open a $10,000 position at 10x leverage, your initial margin is $1,000. The remaining $9,000 is effectively borrowed from the exchange.
The third step is applying the liquidation formula. For a long position:
Liquidation Price = Entry Price × (1 − Initial Margin Rate + MMR)
For a short position:
Liquidation Price = Entry Price × (1 + Initial Margin Rate − MMR)
Where Initial Margin Rate = 1 / Leverage. At 10x leverage, the initial margin rate is 10% (0.1).
Example 1: You go long on BTC at $65,000 with 10x leverage. Binance MMR is 0.4% (0.004). Your liquidation price is: $65,000 × (1 − 0.1 + 0.004) = $65,000 × 0.904 = $58,760. If BTC drops to $58,760, your position is liquidated.
Example 2: You go short on ETH at $3,500 with 20x leverage. Bybit MMR is 0.5% (0.005). Your liquidation price is: $3,500 × (1 + 0.05 − 0.005) = $3,500 × 1.045 = $3,657.50. If ETH rises to $3,657.50, your position is liquidated.
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Not all exchanges use the same MMR. This means the exact same trade setup can have different liquidation prices depending on where you trade. Here are the typical MMR values for major BTC perpetual futures:
Binance: 0.4% MMR for BTCUSDT perp. Binance uses a tiered system where larger positions require higher MMR, but most retail traders stay in Tier 1 with the 0.4% rate.
Bybit: 0.5% MMR for BTCUSD perp. Bybit's slightly higher MMR means your liquidation price is closer to your entry compared to Binance, all else equal.
OKX: 0.3% MMR for BTCUSDT perp. OKX offers the lowest MMR among major exchanges, giving you the most breathing room before liquidation.
The difference matters. For a $65,000 long at 10x leverage: Binance liquidates at $58,760, Bybit at $58,435, and OKX at $59,065. That is a $630 difference between the best and worst liquidation price for the exact same trade. If you are trading with tight risk management, this spread can be the difference between survival and liquidation.
Always verify your specific trading pair's MMR on your exchange's support pages. MMR can differ between USDT-margined and coin-margined contracts, and some altcoin perps have higher MMR than BTC or ETH.
4. Isolated vs Cross Margin
The margin mode you choose fundamentally changes how liquidation works.
Isolated margin means only the margin assigned to this specific position is at risk. If your position is liquidated, you lose only the margin allocated to it. Your account balance and other positions are unaffected. This is the safer choice for most traders because it caps your maximum loss.
Cross margin means your entire account balance serves as collateral for all positions. If one position approaches liquidation, the exchange will use your available balance to prevent liquidation. This can save a position from being closed, but it also means one bad trade can drain your entire account. Cross margin is only appropriate for experienced traders with strict overall account risk limits.
The liquidation formula above assumes isolated margin. For cross margin, the calculation is more complex because it depends on your total account equity, unrealized PnL from all positions, and maintenance margins across all open positions. Most exchanges display an estimated liquidation price for cross margin, but it changes dynamically as your other positions fluctuate.
5. Using Liquidation Price to Set Stop-Losses
Professional traders never let positions approach liquidation. Instead, they use stop-loss orders to exit losing trades long before the liquidation engine kicks in. The liquidation price should serve as your absolute worst-case boundary, not your exit plan.
A common rule is to set your stop-loss at least 20-30% of the distance between your entry and liquidation price. For the $65,000 long at 10x on Binance (liquidation at $58,760), the distance is $6,240. A conservative stop-loss might be at $62,000, giving you $3,000 of buffer before liquidation.
Why not set the stop-loss closer to liquidation? Because slippage and volatility can cause your stop to execute at a worse price than intended. A stop at $59,000 might fill at $58,800 in a fast market, just $40 above your liquidation price. That is too close for comfort.
Use our Position Size Calculator to determine the optimal trade size that keeps your stop-loss within your predetermined risk percentage while maintaining a safe distance from liquidation.
6. Common Mistakes
Ignoring funding fees: Many traders calculate their liquidation price at entry but forget that funding fees are deducted from their margin every 8 hours. At high funding rates, you can inch closer to liquidation even when price does not move. Always factor in funding costs for positions held longer than a day.
Assuming all exchanges are equal: Moving from OKX (0.3% MMR) to Bybit (0.5% MMR) without recalculating your liquidation price is a recipe for surprise liquidations. Always recalculate when switching exchanges.
Not recalculating after adding margin: When you add margin to an isolated position, your liquidation price moves. Traders often add margin to save a position but then forget to update their stop-loss or mental model of where liquidation now sits.
Confusing mark price and last price: Exchanges liquidate based on mark price (an averaged index price), not the last traded price. During extreme volatility, mark price can differ significantly from last price. Your liquidation might trigger before the last price reaches your calculated level.