Liquidation

Liquidation in crypto refers to the process of automatically selling off a trader's assets to cover their losses when their position reaches a certain predetermined level. This level is typically determined by the margin requirements of the trading platform.

For example, let's say a trader opens a leveraged position with borrowed funds. If the price of the asset moves against the trader's position and reaches a certain threshold, the trading platform will automatically liquidate the trader's position to prevent further losses and ensure that the borrowed funds are repaid.

A common example of liquidation in crypto trading is in futures trading. In futures contracts, traders often use leverage to amplify their potential profits, but this also increases their risk of loss. If the price of the underlying asset moves too far in the opposite direction of the trader's position, the trader's margin may be insufficient to cover the losses, leading to liquidation.

Another example is in margin trading. When traders borrow funds from a platform to increase their trading position, the platform may require a certain amount of collateral (margin) to cover potential losses. If the value of the trader's assets drops below a certain level relative to the borrowed funds, the platform may liquidate the trader's position to reclaim the borrowed funds and protect itself from further losses.

Overall, liquidation in crypto trading is a risk management mechanism designed to prevent traders from losing more than they can afford and to ensure the stability of the trading platform.