Liquidation

Liquidation is the forced closure of a leveraged position by an exchange when the trader's margin can no longer cover potential losses. The exchange sells (or buys back) the position at market to protect itself and the counterparties, and the trader typically loses the margin allocated to that position.

For example, a trader who opens a $10,000 long on BTC at 10x leverage with $1,000 margin might have a liquidation price roughly 9-10% below entry. If BTC drops that far, the exchange automatically closes the position; the $1,000 is gone even if the price rebounds minutes later.

Liquidations are a defining feature of crypto derivatives markets. During sharp moves, waves of liquidations can force selling that pushes the price further, triggering more liquidations — a cascade that amplifies crashes and short squeezes alike. Exchanges use insurance funds and mechanisms like auto-deleveraging to handle cases where positions cannot be closed at fair prices. A common misconception is that liquidation happens only when your loss equals your full margin; exchanges liquidate earlier, at the maintenance-margin threshold plus fees, so the realized loss arrives sooner than a naive calculation suggests.