I notice that every time the crypto market makes a sharp jump, analytical services record waves of liquidations on exchanges worth hundreds of millions of dollars. This is not a coincidence — it’s a consequence of how margin trading is structured and how exchange protection mechanisms work. Let’s figure out what’s really happening.

The main idea is simple: major trading platforms allow traders to use leverage — borrow money from the exchange to increase the size of their position. It sounds attractive because when an asset increases by 10%, you can get a 50% profit instead of 10% if you use 5x leverage. But the flip side is — losses are also multiplied by the same leverage. This has been working since 2011, when the first crypto derivatives appeared, and over time it became especially popular among retail traders seeking maximum returns on their trades.

When you open a margin position, you put up collateral — the initial margin. Say you have $100, and you set a 5x leverage. You borrow an additional $400 from the exchange and trade with $500. If the price drops by 10%, your collateral decreases by $50, which is already a 50% loss of your margin. A 20% drop — and your position is automatically liquidated. That’s why liquidations on exchanges happen so often and so massively during volatility.

I remember a case in December 2023 when Bitcoin dropped more than $3 thousand in a short period. Analytical services recorded liquidations of positions totaling about $500 million in one night. Most traders had long positions, betting on a rise, and then — the market moved against them. It’s a classic scenario.

To minimize risk, you need to understand at what percentage decline liquidation will occur. The formula is simple: 100 divided by the leverage size. With 5x leverage — that’s 20%. With 10x leverage — that’s 10%. The higher the leverage, the closer you are to liquidation.

Practical tip: use a stop-loss. This is an order that automatically closes your position if the price drops by a certain percentage. For example, you can set a stop at 2.5% below the entry price. Then, even if the market moves against you, you lose a controlled amount rather than your entire collateral.

Here are two real scenarios. First: you have $5000 in your account, you set $100 margin with 10x leverage, create a position $1000 , and set a 2.5% stop. The maximum loss is $25, or 0.5% of your deposit. Without a stop-loss, the position would be liquidated if the price drops by 10%. Second scenario: $5000 in your account, but you use $2500 margin with 3x leverage, with a position of $7500. A 2.5% stop means a potential loss of $187.5, or 3.75% of your deposit. See? Even lower leverage can lead to bigger losses if the position size is large.

Key point: liquidations on exchanges are not just a technical process — they involve real money from real traders. Therefore, before opening a leveraged position, you need to carefully plan your risk management strategy. Decide how much you’re willing to lose, set a stop-loss, and don’t let emotions take over. The market can always move in ways you didn’t expect, and that’s normal. The main thing — be prepared for it in advance.