Introduction
The term ‘liquidated’ in the world of cryptocurrency refers to a situation where a trader’s position is forcefully closed by the exchange due to insufficient funds to cover losses. This can happen when a trader fails to maintain the required margin balance or if the market moves against their position.
How Does Liquidation Work?
When a trader’s account balance falls below the maintenance margin level, the exchange may liquidate their position to prevent further losses. This process involves selling off the trader’s assets at the market price to cover the outstanding debt.
Example of Liquidation
For example, let’s say a trader has an open position in Bitcoin with a leverage of 10x. If the price of Bitcoin drops by 10%, the trader’s account balance will be reduced by 100%, triggering a liquidation. The exchange will then sell off the trader’s Bitcoin holdings to cover the losses.
Case Studies
- BitMEX: One of the most popular crypto exchanges, BitMEX, has a liquidation engine that automatically closes out leveraged positions if the margin balance falls below a certain level.
- Binance: Another major exchange, Binance, also has a liquidation mechanism in place to protect traders from excessive losses.
Statistics
According to data from CoinGecko, liquidations in the crypto market have been on the rise in recent months, with an increasing number of traders getting liquidated due to market volatility.
Conclusion
Understanding the concept of liquidation in crypto is crucial for traders to manage their risk effectively. By maintaining a healthy margin balance and setting stop-loss orders, traders can avoid the risks of being liquidated and protect their investments in the volatile crypto market.
