Liquidation refers to the conversion of an asset or cryptocurrency for fiat or its equivalents.
What Is Liquidation?
Liquidation refers to the conversion of an asset or cryptocurrency for fiat or its equivalents such as Tether (USDT) and other stablecoins, which can be voluntary or forced. Forced liquidation involves automatic conversion when a trade meets set conditions. In the cryptocurrency industry, force liquidation occurs with margin trading where a trader’s position automatically closes when they fail to maintain the needs of a leveraged position.Note that margin trading involves leverage, which is the multiple of the funds that a trader borrows in order to boost their position. Higher leverage means a lower price range for liquidation. For example, if you want to margin trade BTC/USDT but only have $50, you’re going to need to borrow the remaining $450, which gives you a 10x leverage. If Bitcoin dips by 10%, your investment will be gone and any more losses would eat up the borrowed funds. Since the lender doesn’t want to take that risk, they will convert their BTC to USDT to recoup their share before the price falls further, which means your margin trade will be liquidated.
In some cases, forced liquidation happens before depletion of a trader’s actual share and charges a fee for the same. However, margin trading platforms such as Binance enable users to calculate the liquidation price before entering a leverage position. Mostly, the liquidation price takes into account the position size, leveraged amount, and account balance.
Apart from margin trades, liquidation also happens in the futures market.
Voluntary liquidation, on the other hand, refers simply to a trader deciding to cash out their crypto-asset for their own reasons.