Introduction of Crypto Liquidation & Bitcoin Liquidation
In the world of investing, the term “liquidation” is often perceived negatively and rightly so, because it usually creates panic among investors. The word is frequently used in association with another term, rekt—a misspelling of the word wrecked—to describe the aftermath of a trade gone wrong.
Liquidation is one of the risky aspects of trading digital assets such as Bitcoin and Ethereum, as it can flip one’s portfolio upside down in seconds. In this blog post, we explain the basics surrounding crypto liquidity.
What is crypto liquidation?
In crypto trading, liquidation refers to the forced closing of a trader’s leveraged position due to partial or complete loss of the trader’s initial margin. Liquidations are common in margin trading and futures trading, where traders borrow funds to amplify their positions. While this can lead to higher profits, it also increases the risk of losing it all if the market moves in the opposite direction.
Put simply, a crypto liquidation is the forced closing of a trading position. This usually occurs because the margin to cover a position has run out, meaning the trade has to be settled, and it is a function of leverage.
What happens after liquidation?
After liquidation, the trader’s position is automatically closed by the exchange, as the trader has reached the collateral limit. This means that the trader has lost the funds they used as margin, and their trade ends with a loss or rekt. While the trader does not owe more money to the exchange, the funds used in that trade will be gone. However, if the market moved very fast and the liquidation price was not enough to cover the loss, the trader may owe a debt or face a negative balance, depending on the exchange.
Crypto Liquidation & Global Exchange Liquidations
Crypto liquidation happens when leveraged positions are force-closed due to insufficient margin.
The Global Liquidations Table shows real-time data across top exchanges. visit this site
What is rekt in crypto?
The term “rekt” is a popular crypto slang, which is a shorthand for “wrecked.” In crypto, rekt means to be at a financial loss. It is used when a trader suffers massive losses, often due to liquidation. So, “getting rekt” refers to incurring losses due to a trade or investment going bad. For example, if someone goes all-in on a leveraged trade and the market crashes, causing them to lose everything, they are said to be rekt. It’s a term that highlights the emotional and financial devastation caused by poor trading decisions or extreme volatility.
Read More: Bitcoin CME Gaps: What They Are, and How to Trade Them
Is Bitcoin liquidation good or bad?
Bitcoin liquidation or crypto liquidation in general can be both good and bad, and mostly, it depends on one’s situation and role in the market. To put it simply, it can be a double-edged sword. It is an essential mechanism in leveraged crypto trading, safeguarding both traders and exchanges from excessive losses.
On the positive side, liquidation serves as a critical risk management tool for exchanges and traders. It protects the broader market by ensuring borrowed funds are repaid before a trader’s losses become unmanageable. In margin trading, forced liquidations help maintain the health of protocols by enforcing collateral ratios and limiting systemic risk.
However, for individual traders, especially those using leverage, liquidation is often a negative outcome. It means their position has declined so much in value that the exchange has forcibly closed it, sometimes resulting in the loss of their entire margin. This can happen very quickly in the highly volatile crypto market, catching traders off guard.
Understanding how and why liquidation occurs is essential for anyone involved in leveraged or collateralized crypto trading.
Read More: What is the Crypto Fear and Greed Index?
How to avoid crypto liquidation
In investing, it is impossible to avoid loss in general. However, one can learn how to mitigate risk and manage losses effectively. Here are some ways that can help traders avoid crypto liquidation:
- Avoid high leverage: While leverage allows traders to amplify their position, it increases their risk of a possible loss. So, traders must understand how leverage works before they jump into leveraged crypto trading. For safety, they can always start small, like between 1x to 3x leverage, especially if they are new, or avoid leverage altogether.
- Set stop-loss orders: A stop-loss order helps traders exit a trade before losses get worse. It is a preventive step that protects traders’ capital before liquidation kicks in, so it is crucial to prevent significant loss. Traders can set their stop-loss orders at a point where they can afford to lose but still protect their capital.
- Diversify your portfolio: One of the golden rules of investment is to diversify the portfolio. Traders should spread their investment across several crypto assets, so that even if one crashes, they won’t lose everything.
- Keep extra collateral: Always keep more crypto than needed when borrowing. This helps traders stay safe if prices drop.
- Avoid trading with emotions: Even seasoned traders can make emotional decisions, which can often lead to overtrading, increasing the risk of liquidation. So, don’t give in to emotions and stick to your trading plan and avoid entering trades impulsively.
- Stay updated on market conditions: The crypto market is highly volatile, and external factors like news, regulations, or global events can trigger sudden price movements. Stay updated with market trends and news to anticipate potential risks.
Conclusion
Crypto liquidation can be a double-edged sword. While it protects platforms from insolvent trades and systemic risk, it can devastate traders who misuse leverage or ignore risk management. Understanding how liquidation works and the terminology around it can help traders invest smartly and safely. From investing to understanding when and how to sell, every decision counts in the highly volatile world of crypto. So, always manage your risk, keep leverage low, and tread the market with proper preparation to avoid getting rekt.
FAQs
1. How to track liquidation data in crypto?
You can track live liquidation data on platforms like Coinglass (formerly Bybt) and TradingView. These platforms show real-time liquidation volume, long vs short liquidations, price levels where liquidations occurred, etc.
2. Does liquidation mean debt?
Liquidation does not always mean debt, but it can lead to losses. If your collateral is not enough, the trader might owe money, especially on some platforms that don’t offer insurance or margin protection.
3. What is the liquidation price?
Liquidation price is the price at which a trader’s leveraged position will be forced closed by the exchange due to insufficient margin.
4. What is the crypto liquidation fee?
The crypto liquidation fee varies across platforms. It is recommended to check the fee schedule on the exchange you use to avoid surprises during turbulent market moves.
5. How long does it take to liquidate crypto?
Liquidation can happen almost instantly when a trader’s position hits the liquidation price. When that happens, the exchange automatically closes the trade to prevent further losses. For manual liquidation, such as selling crypto for cash, it usually takes a few seconds to a few minutes on most exchanges.
