Crypto Liquidation: Clearing Debts with Digital Assets

Liquidation is the translation of an asset or cryptocurrency into fiat or its equivalent.

What is Liquidation?

Liquidation is the conversion of an asset or cryptocurrency into fiat money or its equivalent, such as Tether (USDT) and other stabelcoins, which can be voluntary or forced. Forced liquidation includes automatic conversion, which is carried out when the established conditions of the transaction are met.

In the cryptocurrency industry, forced liquidation occurs in margin trading, where a trader’s position is automatically closed if they cannot meet the needs of a leveraged position.Keep in mind that margin trading involves leverage, which is a multiple of the amount a trader borrows to increase their position. Higher leverage implies a lower price range to liquidate.

For example, if you want to trade BTC/USDT on margin but only have $50, you would have to borrow the remaining $450, which provides 10 times the leverage. If bitcoin drops 10%, your investment is gone, and any further losses will eat up the borrowed funds. Not wanting to take that risk, the lender will convert its BTC into USDT to recoup its share before further price drops, which means that your margin trade will be liquidated.

In some cases, forced liquidation occurs before the traders real stake is exhausted, and a fee is charged for this. However, margin trading platforms such as Binance provide users with the ability to calculate a liquidation price before entering a leveraged position.

Typically, the liquidation price takes into account the size of the position, the amount of leverage and the account balance. In addition to margin trades, liquidation also occurs in the futures market. On the other hand, voluntary liquidation is simply a trader’s decision to cash out their crypto assets for their own reasons.