Crypto Futures Liquidation, Margin and Funding Explained
Perpetual futures let you trade a coin's price long or short, with leverage and no expiry date. This guide explains the three mechanics that decide whether a leveraged position survives (margin, liquidation and funding) with hypothetical numbers, then lists common beginner mistakes and safety rules.
Perpetual futures in one minute
A perpetual futures contract tracks a coin's price but never expires. You don't buy the coin; you post margin (collateral, usually USDT) and open a position that gains or loses as the price moves. Leverage is position size divided by margin: 1,000 USDT of margin backing a 5,000 USDT position is 5x.
Two prices matter. The last price is the latest trade. The mark price is a fair-value estimate built from prices across markets, and most exchanges use it to trigger liquidations so that one odd trade can't wipe out positions. And because a perpetual never expires, a periodic funding payment between longs and shorts keeps its price close to the spot market.
Margin and leverage: what actually changes
Leverage doesn't change how far the price moves; it changes how much that move means to your margin. A hypothetical example with 1,000 USDT of margin on a SOL position:
| Leverage (position size) | A 1% price move equals | Share of your margin |
|---|---|---|
| 2x (2,000 USDT) | 20 USDT | 2% |
| 5x (5,000 USDT) | 50 USDT | 5% |
| 10x (10,000 USDT) | 100 USDT | 10% |
| 20x (20,000 USDT) | 200 USDT | 20% |
Exchanges also set a maintenance margin, the minimum equity a position must keep. If losses push the position below it, the exchange force-closes it: that is liquidation.
Liquidation: how far can price move against you?
A rough rule: at leverage L, a move of about 1 / L against you erases the initial margin. Liquidation arrives a little earlier than that, because of maintenance margin and fees.
| Leverage | Adverse move that erases the margin (approx.) |
|---|---|
| 2x | 50% |
| 5x | 20% |
| 10x | 10% |
| 20x | 5% |
| 50x | 2% |
Large altcoins have repeatedly moved more than 10% within a single day, and intraday swings can be wider than the daily close suggests. At 10x, one such day can end the position even if your idea turns out right a week later. Liquidation is also an expensive exit: it happens at the worst moment, and many exchanges charge a liquidation fee on top.
Cross margin vs isolated margin
- Isolated margin: each position has its own margin. The most you can lose on that position is its margin, and liquidation closes only that position.
- Cross margin: your whole futures balance backs all open positions, so a losing position survives larger moves but can consume the entire balance.
A hypothetical example: your futures wallet holds 2,000 USDT, and you open a 5,000 USDT position with 500 USDT of margin (10x).
| Isolated | Cross | |
|---|---|---|
| Money at risk | The 500 USDT margin | Up to the full 2,000 USDT |
| Adverse move before liquidation (approx.) | Under 10% | Under 40% |
| Loss if liquidated | About 500 USDT | Up to about 2,000 USDT |
Neither mode is safe by itself. Isolated margin liquidates sooner but caps the damage; cross margin survives longer but puts everything in the wallet on one outcome. With cross margin, your real leverage is total position size divided by the whole balance, so keep only money you have already decided to risk in the futures wallet.
Funding rates: the cost of holding
Funding is a periodic payment between longs and shorts, commonly every 8 hours, though some contracts use shorter intervals. When the rate is positive, longs pay shorts; when it is negative, shorts pay longs. It is exchanged between traders, it is calculated on the full position size rather than your margin, and you only pay or receive it if your position is open at the funding time.
A hypothetical example: a 5,000 USDT long position with a funding rate of 0.01% per 8 hours.
- Per interval: 5,000 × 0.01% = 0.50 USDT
- Per day (three intervals): 1.50 USDT
- Over 30 days: about 45 USDT
In a heated market the rate can be many times higher. At 0.1% per 8 hours, the same position pays 5 USDT per interval, or 15 USDT a day. Against 1,000 USDT of margin that adds up within weeks, and it is charged whether the trade is winning or losing. Check that any strategy test you rely on includes funding; see how to read a backtest.
Common beginner mistakes, and safety rules
Common mistakes:
- Choosing leverage first. Leverage picked for excitement, instead of from the distance to your exit, can put the liquidation price closer than your stop.
- Using liquidation as the stop-loss. It is the most expensive way out of a trade.
- Adding margin to rescue a losing position. It moves the liquidation price, but it turns a small planned loss into a large unplanned one.
- Adding to positions without a sized plan. Every add-on raises the position size and pulls the liquidation price closer. If a strategy uses add-ons, size the full position, not just the first entry.
- Holding for weeks while ignoring funding.
Safety rules:
- Decide the maximum loss first, then the position size, then the leverage.
- Keep the liquidation price well beyond your planned exit.
- Use isolated margin while learning, or keep only risk capital in the futures wallet.
- Check the funding rate before holding a position across funding times.
- Expect drawdowns deeper than you'd like (see max drawdown explained) and start small.
Whatever tool you use to find entries, such as Pullwave's SOL perpetual futures indicator, these mechanics still apply: the leverage, margin mode and size you set on your exchange decide how a bad stretch ends.
FAQ
Q. What is the difference between a stop-loss and a liquidation?
A stop-loss is an exit you choose in advance. Liquidation is the exchange closing your position because its margin ran out, usually at a bad moment and often with an extra fee. A sound plan exits well before liquidation becomes possible.
Q. Is isolated margin safer than cross margin?
Isolated margin caps what one position can lose but is liquidated sooner; cross margin survives larger moves but can drain your whole futures balance. Either way, the real protection is small positions and only risk capital in the futures wallet.
Q. Who receives the funding fee?
Traders on the other side of the market. When funding is positive, longs pay shorts, and when it is negative, shorts pay longs. It is calculated on the full position size at each funding time.
Q. Can I lose more than my margin?
With isolated margin, the loss on a position is generally limited to the margin assigned to it. With cross margin, your entire futures balance backs your positions and can be lost. Higher leverage makes either outcome arrive faster.
Note: This article is general education, not investment advice. Backtest results describe the past only and do not guarantee future results. Futures can be liquidated and you can lose your capital. Start small.