Liquidations and max pain
Lesson 5 of 12 in the course “Analytics”. Free, with animations and a quiz.
What a liquidation is
Liquidation: the exchange closes your leveraged position by itself when the loss has almost eaten your deposit. That deposit is gone. The higher the leverage, the closer liquidation sits to your entry. Rough rule: 100% / leverage. At 5x it is about 20% against you, at 10x about 10%, at 25x about 4%. Last lesson you looked for where the crowd loaded up on leverage. Now we see what happens when it gets wiped out.
Margin and leverage, simply
Margin is your deposit behind a position, and leverage multiplies it. For example: $100 margin × 10x leverage = a $1,000 position. Price moves 1%: that is ±$10, or ±10% of your margin. So a 10% move against you eats the whole deposit. Isolated margin: you risk only this trade's deposit. Cross margin: your whole account balance is at risk, liquidation is further away, but you can lose more.
The cascade: a domino effect
Price drops and breaks the level where high-leverage longs sit, for example 25x. The exchange closes them with market sells, meaning instantly at whatever price is available. Those sells push price lower, to the 10x longs, then to the 5x ones. Layers fall like dominoes. Shorts get the same thing upward: a short squeeze. That is why sharp moves often run further than the news explains.
Reading the liquidations panel
A liquidations panel starts with the 24-hour total. Example: $420M, 70% of it longs, so 420 × 0.7 = $294M. That means leveraged buyers got punished. Next, look at the split by exchange, the heat map where colour shows which coins got hit hardest, and 4-hour bars over 7 days. They show whether the spike was a one-off or people get wiped out every day.
Example: liquidation price
Example: a BTC long at $100,000, $1,000 margin, 10x leverage, a $10,000 position. Roughly: 100,000 × (1 − 1/10) = 90,000. But the exchange requires maintenance margin, a minimum margin balance, say 0.5%. So liquidation comes earlier: 100,000 × (1 − 0.1 + 0.005) = 90,500, which is −9.5%. At 25x about 96,500, at 50x about 98,500. A calculator does this in a second, but it pays to understand the formula yourself.
Option, strike, expiry
An option is a contract that gives the right to buy (a call) or sell (a put) an asset at a price set in advance. That price is called the strike. Expiry is the day the option ends. The option buyer pays the seller up front and gets a payout only if, at expiry, price has moved past the strike in the buyer's favor. In the picture, the bars show how much buyers would get at different BTC prices.
Max pain on BTC options
Max pain is the price at which option buyers collect the least in total and sellers pay out the least. Example in the picture: $104,000. For BTC it is calculated for each expiry from Deribit data, the largest crypto options exchange. Sometimes price gets pulled toward this level into expiry. But it is not a rule: in a strong trend the market goes right past it.
BTC open interest by exchange
It pays to look at BTC open interest, the money in open futures, by exchange. Example from the picture: Binance 30%, CME 26%, Bybit 16%, OKX 11%, others 17%, 100% in total. CME is a regulated US futures exchange that funds and banks use. OI growth on CME points to big players' interest, growth on crypto exchanges is more often about traders' leverage.
Common mistakes
The trap: treating max pain as a target. It is a level price sometimes drifts to, nothing more. Other mistakes: using big leverage near crowded levels, round numbers and fresh highs and lows where stop-losses and liquidations pile up. Jumping in right after a cascade sure the bottom is in. And above all: not knowing your liquidation price before you enter. Work it out before the trade, it takes seconds.
Check yourself
- Roughly what move against you gets you liquidated?
Correct answer: About 5%, a bit less with maintenance margin. 100% / 20 = 5%. With maintenance margin liquidation hits even earlier, around 4.5%. For BTC that is a perfectly ordinary daily move, so 20x needs a very precise entry. - Why did the drop speed up?
Correct answer: Liquidations close longs with market sells, pushing price to the next liquidations. A forced long close is a market sell, at any available price. Those sells push price down and knock out the next layer of longs, like dominoes. Shorts work the same way upward: that is a short squeeze. - How should you use this number?
Correct answer: As context: price sometimes drifts there into expiry, but it is not a rule. Max pain shows where payouts to option buyers are smallest. Sometimes price really does drift there into expiry, but in a strong trend the market sails past. It is one detail of the picture, not a trade target. - What happened overnight?
Correct answer: A sharp drop: leveraged buyers got wiped out. 80% of $400M is $320M of longs, and longs get wiped out on drops. A big flush sometimes clears the skew and excess leverage, but it does not guarantee a bottom.
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