Liquidation

Liquidation in cryptocurrency trading occurs when a trader’s leveraged position is forcibly closed by the exchange to prevent further losses. This happens when the trader's margin, or the amount of their own money used to open the position, falls below the required maintenance level due to adverse price movements. When liquidation occurs, the exchange sells the trader's assets to repay the borrowed funds, effectively closing the position and limiting the trader's losses. Liquidation is a risk that traders face when using leverage, making risk management crucial in avoiding significant financial losses.

The process of liquidation is automatic and is triggered when the market moves against a trader’s position, reducing the margin balance to a level where it can no longer support the leveraged trade. For example, if a trader uses leverage to open a position in Bitcoin, and the price of Bitcoin falls significantly, the trader’s margin could be depleted to the point where liquidation becomes necessary. This can happen quickly in the volatile cryptocurrency markets, making it essential for traders to monitor their positions closely and maintain sufficient margin to avoid liquidation.