Leverage is the single biggest reason retail crypto accounts go to zero, and it's not because leverage is inherently evil — it's because most traders don't understand exactly how and when a position gets forcibly closed.
How Liquidation Works, Step by Step
- 1.You open a position with initial margin; the exchange calculates a liquidation price based on your leverage and maintenance margin requirement.
- 2.As the mark price moves against you, your unrealized loss erodes your margin balance.
- 3.When equity falls to the maintenance margin threshold, the exchange automatically closes (or partially closes) the position — this is the liquidation price.
- 4.If the position can't be closed at or above its bankruptcy price during a fast move, the exchange's insurance fund absorbs the shortfall.
- 5.In extreme cases, exchanges use auto-deleveraging (ADL), forcibly closing profitable opposite positions to cover the shortfall.
Liquidation Distance (%) ≈ 1 / Leverage (approximate, ignoring fees and maintenance margin tiers)| Leverage | Approx. move to liquidation |
|---|---|
| 5x | ~20% |
| 10x | ~10% |
| 25x | ~4% |
| 50x | ~2% |
| 100x | ~1% |
A large liquidation forces market-sell orders, which pushes price down, which triggers the next tier of leveraged longs' liquidations, which pushes price down further. This is why crypto can drop 10-15% in an hour with no news catalyst — it's pure leverage unwind, not new information.
Why 1% Moves Matter More Than People Think
Bitcoin and Ethereum routinely move 1-3% within a single hour during active sessions. A trader at 50x-100x leverage isn't betting on the market's medium-term direction — they're betting they can survive routine intraday noise, which is a fundamentally different (and far riskier) proposition.
Sizing Leverage Sensibly
- ▸Size leverage to your stop distance, not the exchange's maximum offer — a 2% stop with 10x leverage risks 20% of margin, which is already aggressive.
- ▸Use isolated margin per position so one bad trade can't cascade into liquidating your entire account.
- ▸Keep leverage low enough that your liquidation price sits well beyond normal daily volatility (ATR), not just beyond your intended stop.