Liquidation, which can be voluntary or forced, is the exchange of a cryptocurrency or asset for fiat currency or its equivalents like Tether (USDT) and other stablecoins. Automatic conversion occurs during forced liquidation when a trade meets certain criteria. When a trader fails to meet the requirements of a leveraged position, their position immediately closes, which is known as “force liquidation” in the cryptocurrency sector.
Keep in mind that leverage, or the multiple of the money a trader borrows to improve their position, is a component of margin trading—a reduced price range for liquidation results from greater leverage.
For instance, if you have $50 and want to trade BTC/USDT on margin, you’ll now have to borrow the remaining $450, which gives you 10x leverage. Unfortunately, your investment will be lost if Bitcoin drops by 10%, and any more losses will consume the borrowed money. Since the lender does not want to assume that risk, they will liquidate your margin trade by converting your BTC to USDT to recover their part before the price falls even more.
In some situations, forced liquidation occurs before a trader’s actual share is consumed and has a cost. However, before taking a leveraged position, customers can compute the liquidation price using crypto exchanges for margin trading. Therefore, the position size, leveraged amount, and account balance are mostly considered when determining the liquidation price.
