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When it comes to the cryptocurrency world, there is a lot of jargon that gets thrown around. One term you may have heard is “liquidation.” But what does it actually mean to be liquidated in the crypto world?
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Introduction
Cryptocurrency exchanges liquidate traders when their margin calls aren’t met. In other words, if a trader doesn’t have enough funds to cover their losses, the exchange will automatically sell their assets to cover the debt. This can lead to a snowball effect where the price of the asset crashes, and the trader is left with nothing.
What is liquidation?
In the crypto world, liquidation refers to the process of selling off assets in order to meet financial obligations. This can happen when a company is facing bankruptcy or when an individual is trying to pay off debts. In either case, liquidation involves selling off assets in order to raise cash.
Liquidation can be a voluntary process, as in the case of a company that decides to sell off assets in order to pay down debt. It can also be an involuntary process, as in the case of an individual who is forced to sell assets by a creditor. Regardless of the circumstances, liquidation typically results in the loss of some or all of the equity in the assets that are sold.
When a company goes through liquidation, it is often required to sell all of its assets. This includes inventory, equipment, real estate, and any other property that can be converted into cash. The proceeds from these sales are used to pay creditors and satisfy other financial obligations. Any remaining funds are distributed to shareholders.
Individuals who are facing liquidation may not be required to sell all of their assets. However, they may be forced to sell some assets in order to raise cash. This could include selling a home, a car, or other valuable property. The proceeds from these sales are used to pay off debts and satisfy creditors.
What causes liquidation?
When investing in cryptocurrencies, it’s important to understand the risks involved. One of the biggest risks is what’s known as “liquidation.”
Liquidation occurs when an investor’s position is automatically closed by their exchange due to the value of the asset falling below a certain threshold. This threshold is known as the “maintenance margin,” and it varies from exchange to exchange.
When an investor’s position is liquidated, they not only lose their original investment, but they may also be responsible for paying any additional fees incurred by the liquidation process. For example, if an investor’s position is liquidated on BitMEX, they will be charged a 0.075% fee on the value of their position.
There are a few different reasons why an investor’s position may be liquidated. The most common reason is simply because the price of the asset has fallen too low and the exchange wants to protect itself from further losses.
Another common reason for liquidation is due to what’s known as a “margin call.” A margin call occurs when an investor has borrowed funds from an exchange in order to trade on leverage (i.e., they have used leverage to increase their potential profits). If the value of their investment falls below a certain level, the exchange will issue a margin call in order to get its money back.
If an investor is unable to meet a margin call, their position will be liquidated and they will lose all of their investment plus any additional fees that may be associated with the liquidation process.
Liquidation can be a very costly mistake for investors and it’s important to understand how it works before putting any money into cryptocurrencies.
The Process of Liquidation
When a crypto exchange platform is no longer able to meet its financial obligations, it goes through a process of liquidation. This typically happens when the value of the crypto assets on the platform plummets, and the platform is unable to cover its losses. The process of liquidation can be a lengthy and complicated one, but the end result is that the platform is shut down and all of its users lose their funds.
How is liquidation calculated?
Liquidation is calculated by taking the value of your position and dividing it by the Initial Margin requirement for that position. For example, if you have a long ETH/USDT position with 5 ETH and the Initial Margin Requirement is 10%, your Liquidation Price would be 5 ETH / 0.1 = $50 USDT.
Your Liquidation Price is different from your Margin Call Price, which is the price at which you will receive a margin call from your exchange. A margin call is an order to close out your position to avoid having it liquidated. Your Margin Call Price will usually be higher than your Liquidation Price because it gives you time to react and close out your position before it isliquidated.
What happens when you are liquidated?
When you are liquidated, it means that your position has been closed automatically by the exchange at a price that is worse than the price you paid for it. This happens when the price of the crypto asset falls below a certain level, and the exchange decides to close your position to prevent further losses.
The Aftermath of Liquidation
When a crypto company is liquidated, it means that the company is no longer able to meet its financial obligations. This can happen for a variety of reasons, but typically it is because the company has run out of money. When this happens, the company’s assets are sold off in order to pay its debts. This can be a good thing or a bad thing, depending on the situation.
How to avoid being liquidated
In the cryptocurrency world, “liquidation” occurs when a position is forced to close because the margin falls below the required level. This can happen due to a number of reasons, including price volatility, poor market conditions, or simply because you’ve made a bad trade.
When your position is liquidated, all of your assets are sold off at market value and you are left with nothing. This can be a very costly mistake, particularly if the market conditions were not ideal when your position was closed.
There are a few things you can do to avoid being liquidated:
-Monitor your margin carefully: Make sure you know what your margin is and keep an eye on it at all times. If it starts to fall too low, you may need to adjust your positions or add more funds to your account.
-Use stop-loss orders: A stop-loss order is an order that automatically closes your position if it reaches a certain price. This can help limit your losses if the market turns against you.
-Trade with caution: Be careful about the trades you make and only take on positions that you’re comfortable with. If you’re not sure about a trade, it’s usually best to stay out of it.
What to do if you are liquidated
If you are liquidated, the first thing you should do is stop trading. You will need to assess the situation and figure out what went wrong. Was there a sudden market crash? Did someone manipulate the prices? Or did you simply make a mistake in your trading strategy?
Once you have figured out what caused the liquidation, you can take steps to avoid it in the future. If you made a mistake, learn from it and develop a new strategy. If there was market manipulation, try to find another exchange that is more resistant to manipulation. And if there was a sudden market crash, there is not much you can do except be more cautious in your trading.
It is also important to remember that being liquidated does not mean that you have lost all of your money. You will only lose the money that was invested in the position that was liquidated. So if you have other positions that are profitable, you can still come out ahead overall.
Finally, don’t let a liquidation keep you from trading altogether. While it can be a setback, it is not the end of the world. If you take the right steps, you can come back stronger and avoid liquidation in the future.
