What is liquidation?

Think of a deposit that has to stay above a minimum level. If its value falls far enough, whoever lent you money doesn’t wait for you to decide what to do: they trigger their coverage mechanism. That’s roughly how liquidation works in crypto, whether in leveraged trading or in loans backed by collateral.

For example, you put up €100 as margin and open a €1,000 position with 10x leverage, betting on a rise. A 5% drop means a loss of about €50, before fees. If the drop continues, the platform may close part or all of the position before your margin runs out. The exact threshold depends on its rules, not just on the leverage multiplier.

In decentralized lending, similarly, you may have locked up ETH to borrow stablecoins. If the collateral’s value falls below the required threshold, part of it can be liquidated to repay the debt, often with an extra penalty.

Why it matters

We think the distinction between a drop in value and a forced close is crucial. When you buy crypto on the spot market, without borrowing or using it as collateral, a price drop doesn’t by itself cause liquidation. With leverage, though, you can lose your position before the market has a chance to recover.

Mass liquidations can also amplify a sharp move. Closing positions that bet on a rise creates selling pressure, while closing positions that bet on a fall can create buying pressure. That sometimes leads to a liquidation cascade.

What to watch out for

The liquidation price isn’t necessarily the same as the last traded price you see on the chart. Many platforms use a special reference price (mark price). Also, cross margin can expose more of your available balance than the margin of a single position.

A stop loss is an order to limit losses, not a guarantee of execution at the price you want. In sharp moves there can be slippage. And when you read about millions in liquidations, check what the number measures: it often refers to the notional value of the positions that were closed, not an equal amount of money lost by users.