Margin Call and Liquidation Explained: How Leveraged Trading Can Wipe Out Your Crypto Position

Imagine you buy $10,000 worth of Bitcoin using $2,000 of your own money and $8,000 borrowed from your exchange. That’s 5x leverage. The price drops 20%. Your $10,000 position is now worth $8,000. But you still owe $8,000. Your equity? $0. And that’s not the end - your position gets sold automatically, at the worst possible price, while you’re asleep. Welcome to margin call and liquidation.

What Is a Margin Call?

A margin call happens when the value of your leveraged trading account drops too low. Brokers and crypto exchanges don’t lend you money out of kindness - they need to protect themselves. If your losses eat into the safety buffer they require, they’ll demand you either add more money or sell part of your position.

It’s not a suggestion. It’s a demand. And if you don’t respond fast enough, they sell your assets for you - often at a price you didn’t even see coming.

Here’s how it works in practice:

• You open a position with 5x leverage: $1,000 of your money + $4,000 borrowed = $5,000 total position.
• The exchange requires a 20% maintenance margin. That means you must keep at least $1,000 equity in the account ($5,000 x 20%).
• Price drops 25%. Your position is now worth $3,750. Your equity? $3,750 - $4,000 debt = -$250. You’re underwater.
• The exchange sends a margin call: “Add $250 or sell assets to restore your equity to $750.”

Most platforms don’t wait for you to respond. They watch your margin level in real time. If it hits 10% above the maintenance requirement (say, 22% instead of 20%), you’ll get an alert. If it hits the maintenance level or below? Liquidation starts.

What Is Liquidation?

Liquidation is the forced sale of your assets to cover the loan. It’s not a choice. It’s a system reset.

Exchanges don’t care if you think the price will bounce back. They don’t care if you’re holding for the long term. They only care that the money they lent you is safe. So they sell your position - often in a market where everyone else is selling too.

In crypto markets, this gets ugly fast. During the March 2020 crash, Bitcoin dropped 50% in 48 hours. Thousands of leveraged traders got wiped out. Liquidations hit $1.2 billion in a single day. Why? Because when prices crash, liquidity dries up. No buyers. No bids. The exchange sells your position to the last person willing to buy - at a price 15-25% lower than what you expected.

Some platforms use a “first-in, first-out” method. Others pick the most volatile asset in your portfolio. Binance.US might liquidate your Solana position first, even if your Bitcoin is still holding up. Kraken sells at the best available market price - which can mean selling into a 10% bid-ask spread.

Why Do Margin Calls Happen So Fast in Crypto?

Crypto markets move faster than stocks. They’re open 24/7. There’s no circuit breaker. No halts. No human intervention. A single tweet, a whale dump, or a regulatory rumor can trigger a 30% drop in minutes.

Compare that to stocks. If you’re trading Apple on a margin account with Fidelity, you might have 4 business days to respond to a call. In crypto? You have 10 minutes.

Most exchanges trigger margin calls when your equity hits 100% of the maintenance requirement. Liquidation kicks in at 50% of that level. That means:

• Maintenance margin: 20%
• Margin call trigger: 20%
• Liquidation trigger: 10%

But some exchanges are tighter. Coinbase Pro triggers a margin call at 80% utilization - meaning you’ve used 80% of your available borrowing power. That’s a 20% equity buffer. Binance.US waits until you’ve used 76.9% (130% of maintenance). That’s a slightly bigger cushion.

The difference? One could save your position. The other could kill it.

How to Avoid a Margin Call and Liquidation

You can’t eliminate risk. But you can control it.

Here’s what works:

1. Use less leverage. 5x is dangerous. 2x is survivable. Most retail traders who get liquidated use 5x or higher. The average retail leverage in crypto is 3.2x. The average institutional leverage? 1.5x. You don’t need to match the hype.
2. Keep a buffer. Don’t trade right at the maintenance margin. If the requirement is 20%, aim to keep 30% equity. That gives you room for a 10% price swing before the alarm sounds.
3. Watch your position size. Don’t put 100% of your capital into one leveraged trade. If you have $5,000, don’t open a $25,000 position. Use 20-30% of your balance at most.
4. Use stop-losses. Set a hard stop 5-10% below your entry. It won’t save you from a flash crash, but it reduces the chance of getting caught in a 30% drop.
5. Monitor your margin utilization. Most platforms show a percentage: “Utilization: 78%”. If it’s over 70%, start thinking about reducing exposure. Don’t wait until it hits 90%.

A trader on Reddit lost $28,000 on a Tesla position because their broker liquidated at 12:17 AM during an after-hours gap down. They got the email alert - but it was too late. The market had already crashed. That’s why real-time alerts aren’t enough. You need a plan before you trade.

What Happens After Liquidation?

Your position is gone. Your borrowed funds are repaid. And if your account goes negative? That’s a negative balance.

Some exchanges, like Binance, have insurance funds to cover negative balances. Others, like Kraken, don’t. If you’re left with a deficit, they’ll freeze your account until you pay it back. Some users have reported being locked out for months until they settle the debt.

Liquidation doesn’t just cost you money. It costs you confidence. Many traders who get liquidated once never trade leveraged again. And for good reason.

Dr. Robert R. Johnson, finance professor at Creighton University, says: “Margin calls crystallize paper losses into real losses at precisely the worst moment - when panic is highest and prices are lowest.”

In crypto, that moment happens more often than you think.

Platforms Compared: Who’s Hardest on Traders?

Not all exchanges treat margin traders the same. Here’s how major platforms stack up:

Margin and Liquidation Thresholds on Major Crypto Platforms

Platform	Maintenance Margin	Margin Call Trigger	Liquidation Trigger	Warning System
Binance.US	20%	130% of maintenance (76.9% utilization)	100% of maintenance (100% utilization)	Email + SMS
Coinbase Pro	20%	125% of maintenance (80% utilization)	100% of maintenance	Real-time dashboard
Kraken	25%	100% of maintenance	50% of maintenance	Real-time alerts, 37% fewer liquidations
Bybit	10%	110% of maintenance	50% of maintenance	Auto-liquidation with partial fills
BitMEX (historical)	1%	100% of maintenance	0.5% of maintenance	None - famously brutal

Notice the difference? Kraken gives you more room. Coinbase is stricter. Binance.US lets you get closer to the edge. Bybit is somewhere in between. BitMEX? It was a liquidation machine.

If you’re new to leverage, start with Kraken or Coinbase. They’re less aggressive. Avoid platforms with low maintenance margins - they look tempting, but they’re designed to take your money fast.

The Real Cost of Leverage

Leverage doesn’t just multiply your gains. It multiplies your mistakes.

A 20% drop in a 5x leveraged position wipes out your entire equity. A 10% drop in a 10x leveraged position? Same result.

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, puts it simply: “Leverage is a time accelerator for losses.”

And in crypto, time moves faster than you think.

A 2022 FINRA report found that retail traders with accounts under $25,000 were 3.7 times more likely to get liquidated than those with over $100,000. Why? Smaller accounts can’t absorb volatility. They’re trading with the wrong risk profile.

The solution isn’t more education. It’s less leverage.

What to Do If You Get a Margin Call

You got the alert. Your equity is below the threshold. Now what?

• Don’t panic. Panic leads to bad decisions. Don’t rush to buy more crypto at a high price.
• Check your position. Is it one asset that dropped? Or is your whole portfolio down?
• Deposit funds. If you have cash, add it. Even $50 can push you above the liquidation line.
• Sell part of your position. Reduce your exposure. If you’re long BTC at 5x, sell 20% of it. That frees up equity.
• Wait it out - if you can. If the drop is temporary and you believe in the asset, hold. But only if you have the buffer to survive another 10% drop.

ProTrader89 on Elite Trader says: “IBKR’s SMA tracking helped me avoid 3 margin calls during the 2022 crypto winter by timing deposits.”

He didn’t trade bigger. He traded smarter.

Final Warning

Margin trading isn’t gambling. It’s a high-risk financial tool. And like any tool, it can cut both ways.

The SEC flagged margin lending as the second-highest risk area for brokers in 2022. Over 147 firms got warning letters for poor margin call procedures.

In 2021, the Archegos Capital collapse triggered $15 billion in forced liquidations across global markets. It wasn’t just one trader. It was a chain reaction - because margin systems are connected.

You’re not just risking your money. You’re part of a system that can break.

If you’re trading crypto with leverage, ask yourself: Do I really need this? Am I prepared for the worst? Can I afford to lose it all?

If the answer is yes - then you’re ready. If it’s no - then you’re one bad candle away from being liquidated.

Frequently Asked Questions