Liquidation

When a leveraged position moves far enough against a trader, the collateral backing it is no longer sufficient to cover potential further losses. Rather than allow a negative balance, the platform closes — liquidates — the position automatically. The trader receives whatever remains of the margin after the loss is settled, which can be very little or nothing at all. This is a mechanical process, not a discretionary decision by a human.

Liquidations become market-moving when many traders hold similar positions simultaneously. Suppose a large number of traders are long (betting on price rises) in a cryptocurrency. A sudden price drop triggers liquidations across those accounts; each forced sale adds more selling pressure, pushing the price lower still, which triggers further liquidations. This self-reinforcing loop is called a liquidation cascade, and it is one reason sharp, fast price drops can overshoot what fundamentals alone would suggest.

Liquidation data — the total dollar value of positions forcibly closed — is published in real time by major crypto exchanges and is watched by traders as a sentiment signal. A spike in liquidations on one side of the market often marks a short-term extreme. Liquidation risk is directly tied to the amount of leverage used; higher leverage means a smaller adverse price move is enough to breach the threshold. Understanding margin mechanics is prerequisite to understanding why liquidations occur.