Most traders are accustomed to thinking of liquidations* as one of the most dramatic events in the cryptocurrency market. Prices suddenly plunge or surge, charts turn bright red or green, and analytical platforms begin reporting hundreds of millions of dollars in liquidated positions.
* Liquidation — the forced full or partial closure of an open position by an exchange when the funds posted as collateral are no longer sufficient to cover potential losses.
However, not every liquidation looks like this.
Sometimes the market quietly eliminates a massive volume of leveraged* positions without sharp price movements, sensational headlines, or eye-catching statistics. To most market participants, nothing unusual appears to be happening: the price continues trading within a narrow range, volatility remains low, and the news flow is calm.
* Leverage — a trading tool that allows a trader to open a position larger than their own capital by borrowing funds. For example, 10× leverage enables a trader to control a $10,000 position while posting only $1,000 in collateral.
In reality, exchanges may be gradually reducing traders' risky positions during this period. This mechanism is known as a soft liquidation or partial position liquidation.
How soft liquidation works
In the traditional sense, liquidation is relatively straightforward. Once the price reaches a critical level and the collateral becomes insufficient, the exchange forcibly closes the entire position.
Soft liquidation operates on a completely different principle.
Instead of waiting until the trader's margin* is fully exhausted, the exchange begins reducing the position size before the risk reaches a critical level. In other words, the system attempts to lower potential losses in advance rather than allowing the situation to escalate into a full forced liquidation.
* Margin — a trader's own funds used as collateral when opening a leveraged position.
Instead of executing one large market order, the exchange fills a series of smaller market orders. This approach distributes the volume over time and significantly reduces the impact of liquidation on the asset's price.
That is why soft liquidations often go almost unnoticed. To most market participants, they appear to be ordinary trading activity, even though the exchange is already reducing leveraged exposure behind the scenes.
Major cryptocurrency exchanges have been using similar mechanisms for quite some time.
On many platforms, the process is preceded by a margin call. This warning indicates that a position is approaching a dangerous risk level, while the trader still has an opportunity to add collateral, reduce the position size, or close the trade voluntarily before the exchange intervenes.
If the trader takes no action, the system automatically begins reducing the position in accordance with the exchange's internal risk management rules.
It is important to understand that a soft liquidation does not necessarily mean losing the entire position. In many cases, the exchange reduces the position only enough so that the remaining portion again satisfies the maintenance margin requirements. If the risk is brought back under control, the trader continues holding the remaining position.
This is why two traders who opened identical positions with the same leverage may end up with completely different outcomes: one may lose the entire position, while the other loses only part of it.
Moreover, there is no universal standard. Each cryptocurrency exchange independently determines its maintenance margin requirements, position-reduction stages, and liquidation algorithms. As a result, the same market scenario can produce very different outcomes across different trading platforms.
Why soft liquidations rarely appear in market statistics
Looking at data from popular analytical platforms, one might conclude that the market is relatively calm. Large liquidations are scarce, volatility remains moderate, and the total value of forcibly closed positions appears insignificant.
However, this picture does not always reflect what is actually happening.
Most analytical services primarily track full forced liquidations, in which an exchange closes an entire position due to insufficient collateral. These are the events that appear in daily statistics and generate headlines such as "Positions worth $500 million liquidated in 24 hours."
Soft liquidations are different.
When an exchange gradually reduces a position, each individual transaction resembles an ordinary market trade. To analytical services, these executions are indistinguishable from voluntary buying or selling activity. As a result, a series of small position reductions often goes completely unnoticed as a separate category.
This is especially common during prolonged consolidation periods, when the price appears to remain "stuck" within a narrow range without developing a clear directional trend.
How soft liquidations affect cryptocurrency prices
The defining characteristic of soft liquidations is that they have very little immediate impact on price.
Whereas a traditional liquidation usually consists of a single large market order that can move the price instantly, a soft liquidation splits that volume into numerous smaller trades executed gradually over time.
For the market, the difference is substantial.
The smaller each individual order, the less impact it has on the order book and overall market liquidity. This enables an exchange to reduce even a very large position with minimal visibility to other market participants.
At the same time, the likelihood of severe slippage* also decreases.
* Slippage — the difference between the expected execution price of a trade and the actual price at which the order is filled. It typically occurs when liquidity is insufficient or market prices move rapidly.
This is why, during soft liquidations, an asset's price often continues moving almost sideways. As long as the market remains range-bound, exchanges gradually reduce leveraged positions, lowering the overall level of market risk. The result is a market carrying significantly less leverage.
This creates an interesting effect.
Once a substantial portion of excess borrowed capital has left the market, it takes much less buying or selling pressure to initiate a new major trend. This is one reason long consolidation periods often end with sudden, extremely powerful price moves.
Why cryptocurrency exchanges use soft liquidations
At first glance, it may seem that soft liquidations primarily exist to make life easier for traders. In reality, the mechanism benefits everyone involved — both market participants and the exchanges themselves.
Imagine that a large trader is using substantial leverage. If the exchange closes the entire position with a single large market order, it can cause a sharp price movement. That movement may immediately push other traders toward their own liquidation levels.
From there, the situation can snowball: one liquidation triggers another, then another, and so on. Within minutes, an ordinary market correction can turn into a rapid crash or an equally explosive rally. This phenomenon is known as a liquidation cascade.*
* Liquidation cascade — a chain reaction of forced position closures triggered by a significant price movement. The liquidation of some traders amplifies the price move, causing additional traders to be liquidated and potentially resulting in a sharp increase in market volatility.
Soft liquidations significantly reduce the likelihood of such scenarios.
But market stability is only part of the story.
For exchanges themselves, soft liquidations are also an effective way to reduce financial risk.
During periods of extreme volatility, prices may move so quickly that liquidating a position at the calculated liquidation price becomes impossible. If the remaining collateral in the trader's account is insufficient to cover the resulting losses, the exchange must absorb the difference.
To protect themselves, most major cryptocurrency exchanges maintain dedicated insurance funds for precisely these situations.
The larger the liquidation cascade, the greater the probability that these reserves will need to be used.
This is why exchanges are highly motivated to unwind risky positions as smoothly as possible, minimizing abrupt price swings.
How to detect soft liquidations when they are nearly invisible
The paradox of soft liquidations is that they are almost impossible to observe directly.
Exchanges do not publish separate statistics on soft liquidations, and analytical services generally do not classify them as a standalone category. As a result, traders must rely on indirect indicators.
The most important metric in this context is Open Interest (OI).*
* Open Interest (OI) — the total number of outstanding futures or perpetual contracts that remain open at a given point in time and have not yet been closed, settled, or offset. Rising Open Interest generally indicates new capital entering the market, while declining Open Interest suggests positions are being closed and overall leverage is decreasing.
It is the combination of price action and Open Interest that allows traders to identify what is invisible in ordinary chart analysis and to detect soft liquidations.
Imagine the following scenario: Bitcoin has traded within a narrow range for several consecutive days, with little price movement. At first glance, the market simply appears to be waiting for a new catalyst.
However, if Open Interest steadily declines over the same period, it indicates that leveraged positions are being gradually reduced.
In other words, the market is quietly shedding accumulated leverage even though the price barely reacts.
This data is available through numerous analytical platforms, including Coinglass, Glassnode, and other services specializing in derivatives market analysis.