What Is Liquidation in Crypto?

What Is Liquidation in Crypto?

Have your leveraged crypto trades ever vanished into thin air during wild market swings? Our must-read guide spills the beans on what causes “liquidations” and equips you with foolproof strategies to avoid getting dynamited.

Study up on liquidations with the primer below, or get burned.

When you leverage trade in crypto, your positions better be ready to ride out some wild swings. We're talking flash crashes and pumps around every corner thanks to the 24/7 crypto chaos. One wrong move, and BOOM — your leveraged long gets smoked and you're left twiddling your thumbs as your capital gets wiped out.

Liquidation is the grim reaper of leverage trading, turning portfolios to dust with massive forced sell-offs. Before you go slinging risky margin trades, you best get savvy on liquidations. Consider yourself warned.

Well, fortunately for you, we've just moseyed through the perilous plains of liquidation and wrangled you up a heaping helping of basic knowledge. So dive in and educate yourself.

What Does Liquidated Mean in Crypto?

So, let's chat about this ominous sounding thing known as "liquidation." It's not as fun as it sounds, trust us.

You see, traders can end up being forced to close their position. In layman's terms, they're kicked out of the crypto club because they can't meet the margin requirements for their leveraged position. Their digital wallet is, to put it bluntly, running on fumes.

And when that happens, the exchange steps in. It automatically closes the trader’s position, leaving them blinking in the harsh light of reality. The severity of the loss depends on how much you've been "drinking." The more you've put in initially (the initial margin, that is), and the sharper the price drop, the worse the financial headache.

But, What Is Leveraged Trading?

Oh, yes, leverage trading — it’s when you get to make big gains without plunking down a chunk of change.

You borrow some funds from the exchange and only put down a little collateral, aka your initial margin. While it seems like a sweet deal, it’s not when the price starts buckin' the wrong way. We're talking margin call. Time to pony up extra funds or else say adios to your trade.

Ignore that margin call, and you'll be looking at a forced liquidation. The exchange will snap those positions closed.

The thing is, with all that leverage, prices just gotta move a teensy bit to put you in the liquidation range. So you have to be really careful with risk management.

And here's a final boot in the britches — exchanges actually charge you a liquidation fee just to add insult to injury. They want you to close out that position yourself before it gets to liquidation. But if you don't, they'll do it for you...for a price.

👉 So keep that in mind: leveraged trading can lead you to promise land if you ride it right. But one wrong turn, and it'll toss you right off into a cactus patch.

What Is Liquidation Price?

See, the leverage is how much the exchange lets you borrow relative to your initial stake in the game. Say you put down $200 of your hard-earned dollars and take a 10x leverage. Well that means you're borrowing $1,800 more to pump up your position to $2000 total skin in the game.

Now, if the price moves up 10%, your $2,000 position makes $200 profit. But that's a 100% profit on your original $200 margin! So you pay back the $1,800 loan and ride off into the sunset with $400 (your $200 profit plus your original $200).

Yet … If the price drops 10%, you'll lose $200 off your initial $200 stake — which is a complete beatdown.

Here's the math if you want to calculate your potential profits or pains:

👉 Profit or Loss = (Initial Margin) x (% Price Move) x (Leverage)

Now, a liquidation price is the threshold at which your fancy leveraged trades are shown the door, with no more bargaining or second chances.

But don't go thinking the liquidation price is some static figure etched in the stone. It shifts around depending on your leverage, the market price, how much money you got left in your account, and the exchange's margin requirements.

Also, when we talk about liquidation, it's not a one-size-fits-all deal, and it comes into flavors:

  • Partial liquidation is like the warning shot — just part of your position gets closed out to reduce some risk. You usually do this yourself to avoid getting totally cashed out.
  • Total liquidation is the full-fat version, where your entire trading balance is sold off to cover losses. It's usually a forced move when the trader can't meet the margin requirement.

Now, in some ugly cases, the liquidation price can even exceed your initial margin. Then you're looking at full bankruptcy, and the exchange's insurance fund has to step in and take the loss.

Here's how you can keep tabs on just how much the market needs to shift against you before you're cashed out:

👉 Liquidation % = 100 / Leverage

For example, with 5x leverage, your position hits the liquidation zone if the price moves 20% against you.

So if you're riding a 5x bull on the price going up, a 20% drop would trigger the liquidation alarm bells.

The more leverage you use, the smaller the price move required to reach liquidation. So keep those multiples modest and stay alert on the market. Common sense, really.

What Is a Forced Liquidation?

Forced liquidation is when all your cryptoassets get converted to cash or stablecoins without your say-so. The exchange takes your leveraged position behind the woodshed when you can't pony up the minimum margin requirements. The more leverage you use, the closer that liquidation price lurks.

Say you put in $100 of your own greenbacks for a 10x leveraged bitcoin long position. That means your total position is $1000 — your $100 plus $900 borrowed money. Now if the bitcoin price drops 10%, your $1000 position loses 10% and is only worth $900. Those losses come out of the borrowed $900 first. And the exchange lending the money doesn't take kindly to losses on your behalf. So they'll liquidate your position to protect their capital, leaving you with nada from your original $100 stake.

Exchanges also hit you with a liquidation fee just to twist the knife. So do yourself a favor and close out positions manually before forced liquidation comes a-knockin'.

👉 The good news is that many trading platforms let you calculate your liquidation price upfront. So study this first and understand the liquidation risks before riding off into the leveraged sunset.

How to Avoid Liquidation

To avoid getting liquidated, you gotta use yourself some stop losses.

A stop loss is basically telling the exchange to sell if the price hits a certain point. You set the stop price where you want the selling to start, then the sell price where you actually unload your position.

The main goal is to limit them potential losses from getting out of hand. Let us explain with some examples.

Say a trader has $10,000 but only puts $200 margin with 20x leverage for a $4,000 position. They place a stop loss 3% from their entry. In this case, they'd only lose $120 if hit – just 1.2% of their whole stack.

But without a stop loss, a 5% price drop means forced liquidation. Remember that liquidation formula?

Now say a trader has $7,000 in her trading account and decides to use $4,000 margin and 2x leverage for a $8,000 position. Their 3% stop loss means they could lose $240, which is 3.43% of their account.

👉 The lesson is that position size matters more than leverage. Keep your losses below 1.5% of total holdings per trade. Stop losses help you do that and avoid getting bucked off the bull.

Bitsgap’s Futures & Risk Management Features

Now, if you're on the hunt to transform and automate your futures trading experience, bolstered by top-tier risk management features like stop losses and take profits, then Bitsgap is your go-to platform.

Currently, Bitsgap offers two powerful bots for Binance Futures (with more exchanges on the way): the COMBO bot and the DCA Futures bot.

  • The COMBO bot pairs a GRID strategy with dollar cost averaging. It buys and sells with every flick of the market's tail, following trends up or down. Plus, its automated trailing Stop Loss moves with the trend, safeguarding your hard-earned profits.
  • The DCA Futures bot focuses on averaging your entry price through dollar cost averaging. It buys at different levels, reducing the impact of market swings. This bot can profit whether prices are rising or falling, so you can adapt your strategy no matter the conditions. Unlike the COMBO bot's endless buying and selling, the DCA Futures Bot works in cycles. It opens a position, averages down if the price shifts, then closes at a profit with a Take Profit or Stop Loss order before starting a new cycle.

Needless to say, both bots come packed with extensive customization options, enabling you to fine-tune your risk management features to avoid liquidations.

So if you want to master the futures market without getting thrown to the dirt, climb on into the saddle with Bitsgap's bots. They'll turn you into a top hand trader. Ready?

Bottom Line

Liquidations are common when you're trading with a heap of leverage and facing risky high stakes. Luckily, there are ways to trade without getting REKT. Best practice is using time-tested strategies like stop orders to wrangle potential losses (and keep your gains from bucking off.) But more importantly, you have to know the ins and outs of any strategy you use. Study up on how to work those ropes and when to pull the reins.


What Does It Mean to Liquidate an Account?

The term 'liquidate an account' is financial jargon for selling off all the assets in a particular account and turning them into cash. Investors often resort to this step when they wish to close the account or when they need a quick infusion of cash. This process entails selling all the assets and then moving the resulting funds to another account or withdrawing them entirely. In some scenarios, a broker or an exchange might take the reins and forcibly liquidate an account. This usually occurs when an investor fails to meet the requirements of a margin call. A margin call is, in essence, a formal request from the broker or exchange for the investor to deposit additional assets into the account as a safeguard against potential losses.

Where Can You Look Up Crypto Liquidation Today?

If you're in the market for information on crypto liquidations, then a couple of top choices to consider would be the Liquidation Heatmap from Coinglass, or the chart of liquidated short positions in the derivative market provided by Cryptoquant.

Can Crypto Go Negative?

Usually, a cryptocurrency's value can't dip into the negative; the lowest it can tumble is to zero. This is due to the fact that a cryptocurrency's price is dictated by market supply and demand, and although demand can plummet to zero, it can't drop below that.

If a Crypto Goes Negative Do You Owe Money?

When you trade using borrowed funds, there's a potential risk of accruing debt to the platform or exchange. If the market trends against your position and your losses exceed your account balance, you'll face a margin call, essentially a request to deposit more funds into your account. Should you be unable to fulfill this request, the platform holds the right to liquidate your position to offset the losses. In some instances, if the market experiences rapid and significant changes and the platform can't liquidate your position promptly, you could end up owing an amount greater than your initial investment.

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