Crypto glossary

Bankruptcy Price

The bankruptcy price is the price at which a leveraged position's losses exactly equal the margin you posted, so its value to you is zero. Exchanges liquidate positions before this point, at the liquidation price, to keep a small buffer.

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Bankruptcy price vs. liquidation price

Every leveraged position on a derivatives exchange has two important prices on the losing side. The bankruptcy price is the mathematical end point: one tick beyond it, the position would owe more than its collateral. The liquidation price sits a little before it, separated by the maintenance margin, the minimum buffer the exchange requires.

That buffer exists because a liquidation is a market order and may not fill exactly at the trigger. Closing the position somewhere between the liquidation price and the bankruptcy price means the loss is still covered by your own margin rather than by the exchange or other traders.

How to estimate it

Ignoring fees and funding, the bankruptcy price of a long in isolated margin is roughly the entry price times (1 minus 1 divided by leverage). For a short it is the entry price times (1 plus 1 divided by leverage). At 10x leverage the margin covers a 10% move; at 50x it covers only 2%.

Say you open a 5x long on ether at 2,000 with 400 USDC of margin, a position of 1 ETH. A 20% fall to 1,600 would cost exactly 400 USDC, so 1,600 is the bankruptcy price. The liquidation price will be somewhat higher, perhaps around 1,610, depending on the exchange's maintenance margin.

What happens after a liquidation

If the liquidation engine closes your long at, say, 1,605, the remaining sliver of margin between that fill and the 1,600 bankruptcy price usually goes to the exchange's insurance fund, not back to you. If a fast crash fills the order below 1,600, the position has a deficit, and the insurance fund pays it.

When the insurance fund cannot cover the deficits, many exchanges use auto-deleveraging (ADL): profitable traders on the other side have part of their positions closed against the bankrupt position at the bankruptcy price. That is how a trader who was not wrong can still have a winning trade cut short.

Common misunderstandings

Traders often treat the bankruptcy price as the level where they lose their money. In practice the loss is effectively complete at the liquidation price, which comes first. The formula above is also only an estimate: fees, funding, margin tiers for large positions and cross margin all change the real number, so the exchange's figure is the one that counts.

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Frequently asked questions

Is the bankruptcy price the same as the liquidation price?

No. The bankruptcy price is where the margin is fully used up. The liquidation price comes slightly earlier, so the exchange can close the position while some margin is left as a buffer.

Do I get anything back if I am liquidated before the bankruptcy price?

Usually not. On many exchanges, any margin left between the fill price and the bankruptcy price is transferred to the insurance fund, though the exact rules differ by platform.

Why does higher leverage move the bankruptcy price closer?

Leverage shrinks the margin relative to the position size. With 1/leverage as the share covered by margin, 20x leverage leaves room for only a 5% move before the margin is gone.

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