What Does “Getting Liquidated” Mean in Crypto Trading?

What Does "Getting Liquidated" Mean in Crypto Trading?

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In crypto trading, “liquidation” refers to the process of closing out a leveraged position (a position in which borrowed funds are used to amplify potential gains or losses) due to the value of the position falling below a certain level, known as the “maintenance margin.” This is done to limit the losses of the trader or the trading platform.

When the position’s value falls below the maintenance margin, the trading platform automatically closes out, and the trader’s account is said to be “liquidated.” Of course, this can occur in any market, but leveraged trading can increase liquidation risk if the market moves against the trader’s position.

Here’s an example of how liquidation works in crypto trading:

A trader wants to open a leveraged position of $10,000 in Bitcoin. The trading platform requires a maintenance margin of 10%, so the trader needs to have at least $1,000 in their account as collateral.

Now let’s say the price of Bitcoin falls by 20%, so the value of the trader’s position is now only $8,000. Since the position’s value is below the maintenance margin of $1,000, the trading platform will automatically close out the position and liquidate the trader’s account.

The trader will lose all the money in their account and have to cover any additional losses to the trading platform. This is the risk of leveraged trading and why the maintenance margin is in place.

NB: The examples above are just hypothetical scenarios, and the specific details, such as maintenance margin, leverage, and trading platform, will vary.

How to Avoid Getting Liquidated

Here are a few ways to avoid getting liquidated in crypto trading:

  1. Use proper risk management: One of the most important ways to avoid getting liquidated is to use proper risk management techniques. This means setting stop-loss orders and taking profits at predetermined levels to limit potential losses.
  2. Monitor your position: Always keep an eye on your leveraged positions and monitor the market conditions. Be aware of any sudden changes in the market, such as a sharp price drop, and take action to limit your losses if necessary.
  3. Choose a trading platform with a higher maintenance margin: Some trading platforms require a higher maintenance margin, which means the value of your position can fall by a greater percentage before getting liquidated. Therefore, choosing a higher maintenance margin platform can provide more breathing room for your position.
  4. Do not over-leverage: Leveraged trading can amplify gains, but it also amplifies losses. Therefore, it’s important to use leverage responsibly and not over-leverage your position.
  5. Understand the market: Understand the market you are trading in, be familiar with the conditions that can affect the crypto market, and have the plan to handle them.
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Even with the best risk management, there is always a chance of getting liquidated. In addition, the crypto market is highly volatile, so only investing what you can afford to lose is important.

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