Crypto Liquidation: What It Is and How to Avoid Liquidation in Crypto

1. What Is a Crypto Liquidation and How It Works

If you’ve ever wondered “How does liquidation work in crypto?,” here’s the simple version: when you trade with leverage, you borrow money from an exchange. If the market moves far enough against you that your collateral can’t cover the loan, the platform closes your position automatically.

Example time.

You buy 1 ETH at $4,000 with 10× leverage.

• Collateral: $400 of your own capital
• Borrowed: $3,600
• Total position: $4,000

A 10 % drop to $3,600 wipes out your $400 margin and triggers a forced sale.

In reality, it’s rarely that clean. Exchanges charge funding rates, interest, and fees that constantly eat into your margin. If funding spikes — say, from 0.01% to 0.2% per hour — your liquidation price creeps upward. That means even a 7% move could knock you out instead of the textbook 10%. Traders often forget this hidden friction until it’s too late.

That’s the real answer to how do you get liquidated in crypto: not just through bad luck, but through compounding pressure from leverage, volatility, and time.

2. How Liquidation Cascades Start and Spread

A single trader’s liquidation is noise; thousands at once form an earthquake. Forced sales drive prices lower, which triggers more forced sales — the self-feeding loop known as a liquidation cascade. Understanding the main triggers explains why one red candle can erase billions.

A. Over-Leverage and Crowded Trades

Leverage isn’t evil by itself. The danger comes when everyone piles onto the same trade with borrowed money.

Imagine open interest across futures markets ballooning to $70 billion. A tiny 2% drop in BTC prices forces $2–3 billion in automatic sells. That selling pressure moves the market further down, forcing more liquidations — and so on.

During the October meltdown, that’s exactly what happened. Many traders used excessive leverage on both majors and altcoins. Some were on 10× positions, others only 2× or 3×. Yet even the cautious ones got hit, because when the system-wide cascade starts, it doesn’t discriminate.

Funding rates also played a role. When everyone’s long and paying high funding, you’re essentially renting risk at an inflated cost. When the tide turns, it’s like paying for your own funeral.

B. Thin Liquidity and Market Maker Stress

Liquidity is supposed to be the market’s shock absorber. When it vanishes, even modest trades can crash prices.

During the 2025 liquidation wave, some market makers pulled their bids as prices started sliding — not out of cowardice, but because their algorithms detected extreme volatility. Others weren’t so lucky: cross-exchange hedges failed, and entire books were liquidated in seconds.

The result was a death spiral.

• A $10 million BTC sell order that would normally move the market 0.1% suddenly moved it 2%.
• On smaller tokens, $2 million in sales dropped prices 15–20%.

A few players made money buying the crash, but most were forced to withdraw liquidity to protect their remaining capital. That withdrawal deepened the hole for everyone else.

C. Exchange Pricing Flaws and Token Depegs

This is where things got controversial.

Some market commentators suspect that part of the October 11 chaos was magnified by a design flaw in Binance’s Unified Account margin system, which allowed users to use assets like USDe, wBETH, and BnSOL as collateral.

Instead of using external oracle feeds, that system relied on Binance’s own order-book prices. When traders reportedly dumped roughly $60–90 million of USDe on Binance, its local price briefly dropped to $0.65 while staying near $1 elsewhere. That created an artificial depeg that instantly slashed the collateral value of accounts holding those assets.

As a result, margin requirements shot up, triggering hundreds of millions in forced liquidations on Binance alone — and once those liquidations started, they spread across the entire market through cross-venue bots and arbitrage systems.

Some analysts described it as “a targeted exploitation timed with macro panic,” while others said it was simply bad luck — an unfortunate overlap of an internal pricing weakness and an already leveraged market. Binance later acknowledged “platform-related issues” and implemented oracle-based valuation for collateral.

Whether intentional or not, the episode became a case study in how exchange-side pricing errors can snowball into global contagion.

D. Macro Shocks: The Final Spark

Macro catalysts don’t create leverage, but they light it on fire. On the same day as the issue, global headlines erupted over new 100% U.S.–China tariffs, sending shockwaves through risk markets.

When leverage is maxed out and liquidity is thin, such news acts like a detonator. Traders panic-sell to preserve capital, automated systems dump positions, and fear spreads faster than reason.

Within hours, the mix of structural fragility and macro fear turned a manageable drawdown into a $20 billion liquidation avalanche.

E. Auto-Deleveraging and Forced Matching

Exchanges have built-in insurance funds to absorb bad debt when liquidations can’t close fast enough. But once those reserves dry up, auto-deleveraging (ADL) kicks in — meaning profitable traders get part of their positions force-closed to balance the books.

During October’s chaos, ADL hit multiple platforms simultaneously. Some winning traders saw their shorts partially closed just as prices were collapsing, cutting profits while they were still “right.” It’s the crypto equivalent of friendly fire: not everyone walks away happy.

3. How to Avoid Liquidation in Crypto

Now for what actually matters — staying alive. Liquidations can’t always be predicted, but they can be prepared for. Here’s how to trade smart when the market’s stacked against you.

A. Keep a Safety Buffer

Your best defense against liquidation is excess collateral. Never operate on the edge of the margin call.

If the platform requires 10% margin, keep at least 20–30%. That extra cushion buys time during volatility spikes, fee accrual, or brief price wicks.

Think of it like oxygen underwater: you won’t notice you need it until it’s gone.

B. Respect Leverage, Even Low Multiples

Just because the platform offers 50× leverage doesn’t mean you should touch it. In recent events, even traders using 2× and 3× leverage were wiped out when their collateral assets devalued or funding rates turned punitive.

Use leverage conservatively, and size positions so a 10–15% move against you hurts but doesn’t end you. Surviving another trade is more important than winning this one.

C. Know Your Liquidation Price Before Opening

Almost every exchange now offers a built-in crypto futures liquidation calculator, such as the one we’re seeing on OKX. Use it.

It shows your estimated liquidation level to help you weigh the risk and reward. If that level is within 5% of the current price, you’re flirting with disaster.

Instead of asking, “What if it goes right?” start asking, “Can I still trade tomorrow if it goes wrong?”

D. Monitor Funding and Fees Constantly

Funding is the silent killer. When long positions pay high rates for extended periods, your maintenance margin erodes bit by bit. If funding spikes and you’re paying every hour, your effective leverage increases without you realizing it.

Monitor funding across multiple platforms — and don’t ignore small percentage changes. A funding shift from 0.01% to 0.2% per hour might sound minor, but that’s nearly 5% daily bleed on top of market risk.

E. Stick to Deep Markets

Trade where liquidity lives. BTC, ETH, and a handful of top alts provide real exit options under stress.

Avoid low-cap pairs during volatile periods; they’re liquidation traps disguised as opportunities. When markets tumble, illiquid tokens fall first and hardest.

F. Set Stops and Partial Exits

Don’t go “all-in” on faith.

Use stop-loss orders and laddered exits. For example:

• Close 25% if price drops 3%.
• Another 25% at 5%.
• Reassess the rest.

This reduces emotional decision-making and prevents total collapse from one bad candle.

4. Lessons from the $20B Wipeout

That massive crypto liquidation in October wasn’t random. It revealed how tightly connected leverage, liquidity, and technology really are. A minor pricing error or unexpected macro shock can flip the whole system because every part is leveraged on top of another.

It also reminded traders that even “smart money” isn’t immune. Market makers, institutions, and DeFi protocols all got caught in the crossfire. Risk didn’t disappear; it just rotated.

Since then, exchanges have accelerated plans to adopt external oracles, tighten margin rules, and expand insurance funds. But systems evolve slower than speculation, meaning retail traders must still rely on their own discipline.