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Crypto leverage and perpetuals: how liquidation really works

A perpetual is a crypto contract with no end date and a lot of leverage on tap. It can make a small move feel huge, in both directions. Here's how it works, and where the liquidation line sits before you ever click.

Beginner guide · 10-minute read · Updated 2026-10-21

First, spot vs perpetuals

When you buy bitcoin on a normal exchange, you own the coin. That's spot. If price halves, your coin is worth half. But nobody can force you to sell.

A perpetual future ("perp") is different. You don't own any coin. You hold a contract that tracks the price. You can go long (betting it rises) or short (betting it falls). And you can use Leverage.

Our spot vs futures comparison puts the two side by side.

What "perpetual" means

Normal futures contracts have an end date. On that date they settle and close.

A perpetual has no end date. You can hold it as long as you keep enough money in the account.

So how does its price stay close to the real coin's price? Through funding.

Funding: the rent you pay (or get)

Every few hours, traders on one side pay traders on the other. That payment is the Funding rate.

• When the perp trades above the spot price, longs pay shorts. That pulls the perp price down.
• When it trades below, shorts pay longs. That pulls it up.

On many exchanges this happens every 8 hours. Some charge hourly. The rate changes all the time.

Here's what that means for you. Holding a leveraged perp for days can cost real money, even if price goes nowhere. In a crowded rally, the funding on longs can get expensive.

Leverage and margin, in plain words

Leverage lets you control a big position with a small deposit. The deposit is your Margin.

• 1x: $100 of margin controls $100 of bitcoin.
• 5x: $100 controls $500.
• 20x: $100 controls $2,000.

Your profit or loss is based on the full position size. That's the whole attraction, and the whole danger.

Liquidation: the line that closes you out

If price moves against you far enough, your margin runs out. The exchange closes your position for you. That forced close is liquidation.

As a rough rule, the higher the leverage, the smaller the move it takes:

The real liquidation price comes sooner than this. Exchanges keep a small "maintenance margin" and charge fees, so they close you before you hit zero. Our crypto liquidation calculator works it out for a given trade.

Cross vs isolated margin

Exchanges usually offer two modes:

• Isolated: only the margin you put on that trade is at risk.
• Cross: your whole account balance backs every trade. One bad trade can drain the lot.

For anyone learning, isolated is the simpler, safer way to keep a loss contained. See isolated vs cross margin.

Why liquidations cluster

Here's something charts show again and again. When price drops fast, it hits many traders' liquidation prices at once. Their forced sells push price down further. That hits the next batch.

That chain is a liquidation cascade. It's one reason crypto has sudden, long candles that snap back later. Our guide on crypto volatility has more.

In the US (dated facts)

Many big offshore perp exchanges don't serve US residents. Using a foreign site in a way its rules forbid can leave you with no protection at all.

In July 2025, Coinbase Derivatives, a CFTC-regulated exchange, launched "perpetual-style" bitcoin and ether futures for US traders. Other regulated venues have moved in a similar direction. Products, leverage limits and rules are still changing fast, so check what your platform offers and who regulates it.

The rules we'd set first

Leverage doesn't change how to size a trade. It only changes how much margin you need.

1. Learn on spot first. Same chart skills, no liquidation clock.
2. Set the stop from the chart. Put it where your idea is clearly wrong.
3. Size from the stop. Risk about 1% of the account. Size = money at risk ÷ stop distance. The position size calculator does it.
4. Check the liquidation price is far beyond your stop. If it isn't, lower the leverage.
5. Use isolated margin.
6. Count funding if you'll hold for more than a few hours.
7. Two losses, done for the day. See daily loss limit.

Notice the order. The stop and the size come first. Leverage is just how much deposit the exchange holds while you wait. Our guide to leverage and margin explains this in depth.

Try it today (no money needed)

1. Open a bitcoin chart. Pick an imaginary long entry and a stop from the chart.
2. Size it for 1% risk on a $1,000 practice account.
3. Put the same trade into the liquidation calculator at 3x, 10x and 25x.
4. Which leverage levels put liquidation before your stop?

Questions