What Is the Relationship between Leverage and Liquidation Price?
Leverage is inversely proportional to the distance between the entry price and the liquidation price. The higher the leverage used, the smaller the margin buffer, and the closer the liquidation price is to the entry price.
This means a smaller adverse price movement is required to trigger liquidation. Conversely, lower leverage provides a larger buffer and a liquidation price further away.
Glossar
Leverage and Liquidation
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to magnify potential investment returns, fundamentally altering risk-reward profiles.
Liquidation Price
Trigger ⎊ The Liquidation Price is the specific market price level at which a trader's margin equity falls to the maintenance margin threshold, causing the exchange or protocol to automatically close the leveraged position to prevent the account balance from falling into negative territory.
Adverse Price Movement
Exposure ⎊ Adverse price movement within cryptocurrency derivatives represents a deviation from anticipated directional forecasts, impacting portfolio valuations and risk parameters.