Margin & liquidation

Liquidation forces you out, not your stop-loss, thesis, or patience. When your equity, meaning your margin plus unrealized P&L, falls below maintenance margin, the venue closes your position automatically. There is no phone call.

◇ THE MECHANIC

Initial margin is collateral to open. Maintenance margin is the minimum equity to stay open. Leverage sets how close you start to the edge. At 10× with 0.5% maintenance, a long is roughly 9.5% below entry from liquidation. That is not a distant tail on BTC.

Isolated margin caps loss to that position's collateral. You lose at most what you posted for that trade. Cross margin lets the whole account back the trade. You get more room before liquidation. You also risk the entire balance if multiple positions move against you.

Primary source: Hyperliquid liquidations docs describe the maintenance-margin trigger and mark-price close-out.

◇ THE PURPOSE

Venues need certainty that losses cannot exceed collateral in fast markets. Liquidation engines close your position before your account goes negative. The close may fill worse than your bankruptcy price, leaving socialized losses for the insurance fund. Insurance fund and ADL rules handle what is left. A liquidation cascade can follow when OI is crowded. The details are venue-specific. The trigger is universal: equity below maintenance.

◇ THE RISK

"I was right eventually" is irrelevant if you were liquidated on the way down. Stops are optional. Liquidation is not. High leverage turns normal intraday volatility into an exit event. Funding (Lesson 03: the hourly transfer between longs and shorts) can erode equity silently while you wait for a bounce. Weekend and thin-book flushes — like the December 2021 cascade — and forced institutional selling — like Celsius and 3AC in June 2022 — show the same trigger: mark crosses maintenance, and the engine does not wait.

◇ WORKED EXAMPLE

$2k margin · 10× long BTC at $67,000 · 0.5% maintenance

$60,635 liquidation · −9.5% from entry

	Isolated	Cross (+$1k account buffer)
Margin at risk	$2,000	$3,000 usable
Notional	$20,000	$20,000
Liquidation price (long)	$60,635	Higher: extra $1k absorbs drawdown
Move to liquidation	−9.5% from entry	Farther: whole account backs position

Formula (long): liq ≈ entry × (1 − 1/leverage + maintenance%).
$67,000 × (1 − 0.10 + 0.005) = $60,635.

Isolated: you lose at most the $2,000 posted. Cross: the extra $1,000 can delay liquidation. It can also disappear with the next position if the book is correlated.

Funding shrinks equity quietly. Liquidation ends the trade when equity hits the floor.

◇ RECAP

• What are you holding? A margined position with a hard floor under equity.
• What do you pay while holding? Funding erodes margin (Lesson 03: the recurring transfer that bleeds collateral while you wait).
• What forces you out? A maintenance breach. The venue closes the position automatically with no call and no grace.
• When is a perp wrong? When volatility times leverage exceeds your buffer (Lesson 06: long horizons where carry and forced exit dominate).