Liquidation

Liquidation in trading happens when a trader borrows money to make a trade (this is called trading on margin or using leverage), and the trade goes so badly against them that the exchange or broker forcibly closes their position to prevent further losses. At that point, the borrowed funds are returned to the lender, and the trader loses their own money that was used as a safety deposit — called collateral. It’s one of the most dramatic and painful outcomes a trader can experience, and understanding it is essential before ever touching leveraged products.

When you trade with leverage, you’re essentially amplifying both your potential gains and your potential losses. If you use 10x leverage, a 10% move against you wipes out 100% of your collateral. Exchanges set a threshold called the “liquidation price” — a specific price level at which your losses have eaten through enough of your collateral that the system automatically closes your position to protect the lender. You don’t get a vote in this; it happens automatically, often in milliseconds.

Example: Imagine you want to buy $1,000 worth of Bitcoin but you only have $100 in your account. A crypto exchange lets you borrow the remaining $900. You now control $1,000 worth of Bitcoin using only $100 of your own money — that’s 10x leverage. If Bitcoin’s price drops just 10%, your $1,000 position is now worth $900. Since that’s exactly what you owe the exchange, your $100 is entirely gone and your position gets liquidated. The exchange closes everything out automatically to make sure it gets its $900 back, and you’re left with nothing.