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Beginner's Guide to Crypto Liquidations: How to Avoid It and Use in Analysis
Author: Alexander
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In leveraged trading, liquidation is no boogeyman: it can throw a wrench into any strategy. Before opening a leveraged position, learn everything about crypto liquidation in our guide! We will also tell you how you can turn this predicament to your advantage by learning from others.

Key Takeaways

What does liquidation mean?

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Broadly speaking, liquidation implies selling someone’s assets to cover expenses, pay off debts or borrowed funds, or limit risk exposure. Liquidation can occur in different contexts: personal assets, business, and in a market. Crypto liquidation is a type of market liquidation in which a trader’s leveraged position is closed automatically by the exchange or trading platform.

Not any type of position can be closed like this. A broker or exchange takes these measures if the trader’s position is opened using the platform’s funds. Borrowing is typical for leveraged trading or margin trading. When the trader’s losses reach a level where they no longer have enough funds in their trading account to maintain their position, it is closed by the liquidation process. In addition to protecting the trading platforms, it also in a way protects traders from excessive risk by preventing them from losing the initial capital and going into debt.

Unexpected liquidations are not the norm, even though in the crypto market a sharp price drop can cause cascades of liquidations. Before a forced liquidation occurs, when the trader’s margin level drops below the** maintenance margin**, determined by the platform, a margin call is issued. In this case, forced liquidation can be avoided by bringing the margin level back with extra funds. Traders also usually know the liquidation price, which helps them adjust their trading strategy.

Read more: Beginner’s Guide to Crypto Margin Trading: Why, How, and Where to Do It

Alternatively, crypto liquidation can be voluntary or partial. Partial liquidation involves selling only a portion of the assets in a trading or investment portfolio to realize profits, rebalance the portfolio, or manage risk without completely exiting the market. Maintaining exposure to investment while freeing up cash or adjusting asset allocation — a sound and balanced decision.

When should you keep liquidation in mind? Mostly when trading with leveraged positions or with margin on derivatives markets. While less common, liquidation can also happen in spot trading if the trader is using leverage or margin and their account equity falls below the required maintenance margin.

How to Avoid Forced Liquidation?

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A forced liquidation can wipe out an entire trading balance so it’s normal to want to avoid a total liquidation. As we have explained, it is rather predictable and manageable. Here are some tips:

Read more: Beginner’s Guide to Crypto Spot Trading: What it is and How it Works

Tips to Avoid Crypto Liquidation

The crypto market is somewhat different from more traditional markets. It bears higher risks and is inherently more volatile. With this in mind, here is what we can suggest to avoid a forced liquidation of a crypto position:

And as always is the case with trading, impulsive decisions and acting on emotions are your enemy. Stay focused to mitigate the partial or total loss and correctly recognize opportunities.

Liquidations as Analysis Tool

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Even though it’s something to be avoided if it can be helped, crypto liquidations are bound to happen as the trading volumes reach hundreds of billions these days. Did you know that this data can be used for valuable insights?

The crypto liquidation data can hint at market sentiment, potential price movements, and overall market dynamics. For example, a high number of liquidations may indicate panic selling or excessive leverage in the market, suggesting a potential market reversal or correction. Monitoring liquidation data can help traders anticipate and react to sudden price movements triggered by cascading liquidations.

Liquidation data can reveal the level of leverage being used by traders. High liquidation rates may indicate that traders are over-leveraged, increasing the likelihood of cascading liquidations and market volatility. Traders also use it to identify key support and resistance levels. For example, a cluster of liquidations at a specific price level may indicate a strong support or resistance level where traders are getting margin called.

Moreover, unusual patterns in liquidation data could suggest market manipulation or coordinated trading activities. Traders and investors can use liquidation data to assess the risk level in the market. Understanding the frequency and magnitude of liquidations can help traders adjust their risk management strategies and position sizes accordingly.


We hope that now you are better equipped to manage your leveraged positions. Sometimes you may go for partial liquidation if needed or have to calculate if the total liquidation really is the worst-case scenario.

Was the advice in this article helpful? Let us know! Join the conversation on X, Facebook, Telegram, or the subreddit. Find even more content for crypto traders and fans on our blog.

Frequently Asked Questions

What is a liquidation in crypto?

In crypto trading, liquidation is when a trader’s position is automatically closed by the exchange due to insufficient funds to cover losses. It helps prevent further losses by closing the position before it becomes too risky. Exchanges use liquidation to protect traders and the platform from excessive risk.

Where can I see crypto liquidations?

You can see crypto liquidations on many trading platforms by checking the liquidation feed or liquidation section on the exchange. This data typically shows recent liquidations, including the asset, quantity, price, and the reason for liquidation. Some third-party websites also provide real-time updates on liquidations across multiple exchanges.

How do you avoid liquidation in crypto?

To avoid liquidation in crypto trading, set appropriate stop-loss orders to limit potential losses. Additionally, carefully manage your leverage and only use leverage you can afford to lose. Regularly monitor the market and your positions to make timely adjustments if needed.

What happens at the liquidation price?

At the liquidation price, the exchange automatically closes a trader’s position to prevent further losses. This occurs when the trader’s margin balance falls below the required maintenance margin. Liquidation protects the trader from losing more than their initial capital.


This article is not a piece of financial advice. When dealing with cryptocurrencies, remember that they are extremely volatile and thus, a high-risk investment. Always make sure to stay informed and be aware of those risks. Consider investing in cryptocurrencies only after careful consideration and doing your own research.