Leverage & Liquidation
How do leverage and liquidation actually work?
How does leverage change loss and liquidation risk?
Leverage lets a smaller margin support a larger position, magnifying gains, losses and fees relative to that margin. Liquidation occurs under the venue's rules when account equity falls below a maintenance threshold. The exact price depends on maintenance margin, fees, collateral, mark-price rules and position mode—not simply one divided by leverage.
By: Sherpa Desk
Review status: Source-checked by the CryptoSherpa Editorial Desk; no named derivatives professional has reviewed this guide.
Scope: United States; product and venue eligibility varies.
- Initial margin
- Collateral required to open a leveraged position
- Maintenance margin
- Minimum equity threshold used in the venue's liquidation process
- Mark price
- Kraken ties its estimated liquidation price to the mark-price level that would take the relevant margin wallet below maintenance margin
- 1Confirm whether the product is legal and available to retail customers where you live.
- 2Read the venue's maintenance-margin, mark-price, funding, liquidation and loss rules.
- 3Model loss on the full position and include fees, not just the margin posted.
- 4Avoid the product if you cannot explain the liquidation trigger and maximum liability.
Leverage changes exposure, not just buying power
With 10x leverage, $100 of margin can support roughly $1,000 of exposure. A 1% move in the underlying position is about a 10% change relative to that initial margin before fees and other adjustments. Both gains and losses are magnified; there is no safety benefit in the multiplier itself.
The common 1 ÷ leverage shortcut estimates how much initial margin represents as a percentage of exposure. It is not an exact liquidation formula. The rules differ by venue, product, position size and margin mode.
Kraken’s published derivatives schedule, for example, separates initial margin from maintenance margin and applies different requirements by contract and position-size tier. Its liquidation FAQ says the displayed liquidation price is only an estimate of the mark-price level that would take the relevant margin wallet below its maintenance requirement; account balance, collateral value and premiums or discounts can change that estimate. Coinbase International describes a different staged process that may cancel orders, partially or fully liquidate positions, and sell non-USDC collateral. These are examples of venue rules, not formulas to reuse elsewhere.
Read the contract before the chart
Identify the legal entity and product, then find its contract specification. Write down the initial and maintenance margin, which price triggers liquidation, whether positions share collateral, how funding works, and whether losses can exceed your posted amount. If these answers are unclear, the product is not understandable enough to use.
Liquidation is an automated risk-control process for the venue; it is not a stop-loss guarantee for you. Coinbase warns that liquidation can involve higher fees and less-favourable pricing than a self-executed trade. Its published international process also includes an insurance fund and auto-deleveraging at later stages, but that does not make either mechanism a customer guarantee.
Jurisdiction comes first
The CFTC warns that leverage amplifies virtual-currency risk and that customers can lose more than their initial investment in some products. An offshore page accepting a click does not establish US product eligibility. Check the exact legal entity and permissions; never bypass location controls.
For most people trying to use crypto safely, avoiding leverage removes an entire layer of liquidation, funding and complex counterparty risk. That is a risk boundary, not a price prediction or personalised recommendation.
Sources
Primary and authoritative sources checked on the dates shown:
- Customer Advisory — Understand the Risks of Virtual Currency Trading — U.S. Commodity Futures Trading Commission; accessed .
- Liquidation FAQ — Kraken Derivatives; accessed .
- Derivatives Margin Schedule & Maximum Leverage — Kraken Derivatives; accessed .
- Liquidation management (International Derivatives) — Coinbase Help; accessed .
Questions
Does 10x leverage mean liquidation happens after exactly a 10% adverse move?
No. Ten per cent is only rough pre-fee intuition for initial margin equal to one tenth of exposure. Maintenance margin, fees, mark-price rules, account collateral and position mode can move the trigger.
Can I lose more than the margin I post?
It depends on the product, jurisdiction and venue rules. The CFTC warns that leveraged virtual-currency products can produce losses beyond the initial investment. Read the loss and negative-balance terms before opening anything.