The forced closing of a leveraged position by the exchange when losses consume the posted margin.
In crypto, liquidation is automatic and fast. When your position's loss approaches your collateral, the exchange's engine closes it, often with a penalty fee. Cascading liquidations, where forced selling triggers more forced selling, produce the market's sharpest moves.
Liquidation price depends on leverage: at 10x, roughly a 10% move; at 50x, about 2%. It is the crypto equivalent of a margin-call without the call.
Example: long $20,000 of ETH at 20x with $1,000 collateral. A 4.5% drop, plus fees, wipes the collateral and the position is liquidated. You lose the full $1,000.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
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