Forced liquidation

Forced liquidation in crypto occurs when a trader's position is automatically sold off by an exchange to cover losses when it falls below a certain threshold, typically due to insufficient margin or collateral. This mechanism is employed to prevent further losses to the trader and the exchange.

Example:

Trader A borrows funds from the exchange to leverage their position in Bitcoin. They enter a long position, expecting the price to rise. However, if the price of Bitcoin declines sharply, and the value of their position falls below the required margin, the exchange may force liquidate their position to cover the losses.

Case:

In March 2020, during the cryptocurrency market crash triggered by the COVID-19 pandemic, many traders experienced forced liquidations as prices plummeted rapidly. For instance, on March 12, 2020, Bitcoin's price dropped over 50% within a day, leading to significant forced liquidations across multiple exchanges. Traders who were highly leveraged faced substantial losses as their positions were forcefully closed to mitigate further losses.