What Is Leverage and Liquidation? Risks and a Worked Example

Leverage is the ratio of a position's size to its collateral: leverage = position size ÷ collateral, so at 10x collateral is 10% of the position. The US Commodity Futures Trading Commission's customer alert says participants often post only part of a contract's value, which creates leverage and magnifies the underlying risk.

The same factor magnifies gains if the price moves in the holder's favor and losses if it moves against. The European Central Bank's May 2022 report states that some crypto exchanges allowed positions up to 125 times the initial amount.

Liquidation is the platform's forced closing of a position once collateral falls below a threshold. Platforms track a margin level: equity divided by collateral used. A margin call may come when it falls to a threshold the platform sets; at a second, lower threshold the position is closed by force. Thresholds vary by product, platform and market conditions, and the current values are in the platform's own documentation.

Forced closing runs automatically under the platform's rules and may include a liquidation fee; the position can close at the price in the order book at that moment, so the closing price can differ from the calculated level. The commission warns that after adverse moves, collateral must be topped up or positions closed, and that losses can exceed the initial investment.

In the simple model, which ignores fees and funding costs, a long position's liquidation price is entry price × (1 − 1/leverage + maintenance margin ratio). For a short position it is entry price × (1 + 1/leverage − maintenance margin ratio). The Lzzo.com position calculator shows this model as a “hypothetical liquidation level”, assuming a 0.5% maintenance margin ratio.

Real platforms use their own formulas and thresholds; the published calculation is the reference. Those formulas can include the maintenance margin ratio, fees, funding costs and other positions in the account.

In the same model, with a 0.5% maintenance margin, the fall to liquidation for a long position is about 1/leverage − 0.5%:

• 2x: about 49.5%
• 5x: about 19.5%
• 10x: about 9.5%
• 20x: about 4.5%
• 50x: about 1.5%
• 100x: about 0.5%

The European Central Bank's May 2022 report says adverse moves can cause sharp jumps in liquidation volumes that deepen price falls.

The Bank for International Settlements' quarterly review of 16 March 2026 says Bitcoin fell about 50% from its 2025 peaks, moves probably intensified by liquidations of leveraged long crypto positions.

In March 2018 the European Securities and Markets Authority announced measures for retail contracts for difference (CFDs), with a 2:1 leverage limit for crypto assets. Positions had to be closed when collateral fell to 50% of the minimum level, and negative balance protection set a general ceiling on retail losses. According to national regulators' analyses, 74% to 89% of retail accounts usually lost money on these products.

The European Securities and Markets Authority's measures were temporary and applied in three-month periods; check today's rules in national regulation. They targeted specific products and do not apply on every platform. Türkiye's rules are not among this guide's sources; check local law against official sources.