Liquidation Heatmap Explained (How To Use It in Crypto)

The liquidation heatmap is like a crypto weather radar – it can help you spot the next big crypto liquidation storm. In this guide, I’ll explain what the crypto liquidation heatmap is, how it works, and how to use it the right way in your trading or investment strategy. Let’s jump in.

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How liquidations work in crypto

To understand the liquidation heatmap, let’s first understand what it measures: liquidation levels for crypto perpetual swaps.

Perpetual swaps (aka “perps”) track the prices of different cryptos like bitcoin or ether (take your pick). Perps are a kind of derivative – meaning you don’t need to own the crypto itself to profit (or lose) from its price swings. 

Now, one of the joys (and dangers) of trading perps is their extreme leverage. For example, you could long (buy) $10,000 worth of bitcoin perps with just $1,000. The other $9,000 of your trade would be covered by other traders using your exchange (i.e. the exchange’s liquidity). If bitcoin goes up, you’d earn 10x the profits (minus trading and perpetual swap funding fees). But if bitcoin falls, you’d face 10x the losses.

Perpetual swaps trade on big exchanges like Binance, Bybit, and Prime XBT. If bitcoin drops by 10%, the exchange will automatically liquidate (close) your $10,000 position so they (and you) don’t end up losing more money. 

There goes your $1,000 “deposit”. 

And as a side note, that’s also why you should use a stop loss when leverage trading.

How the crypto liquidation heatmap works

Let’s say you bought your bitcoin perps on Binance when bitcoin was trading at $60,000 a coin. Since you’re using 10x leverage, your liquidation price would be somewhere near $56,000. This information would feed into Binance’s bitcoin liquidation heatmap – along with all the liquidation levels of every other perp trader on the exchange. 

Here’s the Binance liquidation heatmap for bitcoin below, taken from Coinglass. The heatmap highlights and color codes all the liquidation regions over the past week. When you see yellow, it means more money would likely get liquidated at those prices. So in the chart below, the yellow line shows a bitcoin price level of around $61,700. If bitcoin were to drop to that level, there could be almost $180 million worth of liquidation leverage up for grabs.

Here’s a full breakdown of the liquidation heatmap color codes and what they mean:

• Purple to blue: lowest potential for liquidations.
• Blue to green: medium potential for liquidations.
• Green to yellow: highest potential for liquidations. 

Side note: The amount of liquidation leverage shown in the heatmap won’t be exact – and might be overstated. That’s because traders often close their positions before the price reaches their liquidation levels. After all, it’s better to close your trade on your own terms than have the exchange close it for you.

Another side note: The chart above shows the liquidation heatmap for Binance, using the BTCUSDT perp, and looks back one week in time. On Coinglass, you can change the crypto exchange, the perp, and look back time to suit your analysis.

What information can you gather from the liquidation heatmap?

On the surface, the heatmap tells you where big liquidation levels are likely to occur. But if you go deeper, here’s what the heatmap can show you:

Potential price “magnet zones”: If you see a cluster of liquidation levels around a specific price, that area can sometimes act like a “magnet zone”. The price might move toward it because of the high potential for liquidations. Some traders use this to help them guess the next price direction.

Think of a magnet zone like a vacuum cleaner. When the price gets close to one of these zones with lots of liquidations waiting, it’s like turning on the vacuum. The suction pulls everything toward it. As the price approaches, it triggers liquidations, which in turn pushes the price even closer to the yellow liquidation lines. Traders watch these zones because they know when the vacuum starts, the price might get pulled right in.

Preferred whale trading zones: Big traders (whales) can’t just buy or sell $100 million worth of crypto on an exchange in one go. If they did, they’d move the price before their order could fill. So, they’d end up getting major “slippage” on their trade – i.e. a worse price than what they wanted. 

But in those big liquidation zones, there’s a high concentration of trading volume and liquidity. So, the whales can buy or sell in size without moving the price as much.  

Sidenote: If you’d like to learn more about whales and how they trade, check out my Wyckoff Method guide.

How to use the liquidation heatmap in your crypto strategy

You don’t need to be a leverage perp junkie to use the liquidation heatmap – it can be useful for regular crypto traders and investors, too. Here’s how to use it in your strategy:

Spotting potential price reversal zones: If you know where the big liquidation levels lie, you can get a better sense of where price reversals might happen. A high concentration of liquidation levels in a certain area could mean that the price is about to be pulled toward that zone, then bounce back. It’s an extra layer of insight to combine with regular price support and resistance analysis.

Planning your entries and exits: If you’re planning a trade and see a heavy liquidation zone, you might want to enter or exit your position before the price reaches that level. This can help you avoid getting caught in the volatility storm that liquidations can trigger.

Understanding market sentiment: Liquidation heatmaps can give you insight into how traders are positioned in the market. If there are more liquidation levels to the downside, it could mean that more traders are in leveraged long positions – and vulnerable to market drops. More liquidation levels to the upside could mean the opposite: there’s more short positions that could get liquidated if the price moves higher.

More often than not, the market likes to brings the pain to as many traders as possible.

Keep that in mind when using the heatmap.

As usual, none of this is investment advice. If you liked this piece, check out my free newsletter for how-to guides and investment insights across crypto, stocks, metals, and more.

Key takeaways

• The liquidation heatmap shows different levels where leveraged perp traders might be liquidated in crypto. 
• You can view the liquidation heatmap on Coinglass, and set it to your preferred trading pair and time frame.
• The yellow lines on the heatmap have the potential for the most liquidations. You can use these levels as part of your trading strategy to find potential areas of price support and resistance.