CRYPTO GUIDANCE INC.

Kansas City, MO

What Is a Liquidation?

A liquidation is the exchange force-closing a leveraged position because its losses are about to exceed the trader's collateral. The market did not merely go against you. It went against you far enough that the lender took the wheel.

How It Actually Works

Open a position with leverage and the exchange computes a liquidation price: the level where your margin no longer covers the loss. Touch it and the engine closes you out automatically, usually charging a liquidation fee on the way. Higher leverage puts that trigger closer to your entry. At 20x it sits roughly 5 percent away, which in crypto is a Tuesday.

Liquidation Cascades

Liquidations are market sells (or buys, for shorts). A sharp dip triggers the nearest batch, whose forced selling pushes price into the next batch, and so on. This chain reaction is why crypto produces sudden vertical moves that vaporize hundreds of millions of dollars of positions in minutes, then bounce as if nothing happened. Headline writers call it a flush. The people inside it call it something else.

Risks and Common Mistakes

Not knowing your liquidation price before entering. It is displayed. Look at it and ask how often this asset moves that much in a day.
Trusting a stop-loss to save you. A stop-loss placed inside a cascade can fill far below its trigger. Thin books make it worse.
Treating survival as skill. Surviving 20x three times teaches a lesson that the fourth time invoices.

When It Matters

Watching liquidation totals also has an educational use: big cascade days show up in open interest dropping suddenly, and they explain violent price action that news stories attribute to nothing at all. Context on my Trading and Market Analysis page.