MetenaLeverage and liquidation: a 2022 bitcoin example
Borrowing to take a position larger than your capital. It amplifies gains and losses alike and can lead to the position being liquidated.
Definition
With ×5 leverage, $1,000 of collateral opens a $5,000 position. A 10% rise earns $500, or 50% of the collateral; a 20% fall wipes out all the collateral.
Before that, the exchange liquidates the position: it closes it automatically when the loss approaches the collateral deposited. The higher the leverage, the closer the liquidation price is to the entry price. For a long position, it sits roughly at: entry price × (1 − 1/leverage).
How to read the chart
The green dot marks the purchase on 28 March 2022. Each horizontal line is the approximate liquidation price of a long position at ×2, ×5 and ×10.
A dot on a line marks the day the daily low touched it. The calculation ignores maintenance margin and fees, which bring liquidation even closer.
Worked example
A purchase on 28 March 2022, at $47,122. At ×10, liquidation near $42,410 comes on 8 April, eleven days later. At ×5, near $37,698, on 30 April. At ×2, near $23,561, on 13 June. Without leverage, the position would have lost up to 63% over the period, without ever being closed automatically.
In Metena
For a leveraged position or a loan, Metena calculates the fall that would trigger liquidation and warns you when it is below 25%.
Notify me at launchRelated terms
- Money management
- Managing the size of your positions and your exposure: how much to risk per holding, what reserve to keep, which limits never to cross.
- Stress test
- Simulating your rules through a historical shock, such as the March 2020 crash, the LUNA collapse or the FTX bankruptcy, to see what they would have absorbed.
- Funding rate
- A periodic payment between buyers and sellers on perpetual contracts. Strongly positive, it indicates leveraged buyers dominate and the market is stretched.
- Open interest
- The total value of derivative contracts still open. Record open interest signals a lot of leverage in the market, so sudden moves are more likely.
Related guides
- Crypto risk management: position sizing, leverage and liquidation
- How much to put in each position, what leverage really changes and why diversifying across cryptocurrencies protects little: real bitcoin and ether examples.
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Notify me at launchEducational content. It is not investment advice. Crypto-assets carry a high risk that can go as far as the total loss of capital.