What is a liquidation?
Many people still do not understand.
Let me explain it to you all.
Suppose Bitcoin is $50,000, and you spend $50,000 to buy one Bitcoin; this is a regular transaction.
But there is also the concept of leveraged trading. You still buy one Bitcoin, but this time you only need to put down 10%, $5,000, and I will cover the remaining 90%, which is called 10x leverage trading.
Of course, the $45,000 that I provide for you is not free; it is a loan that you must repay later.
If Bitcoin rises to $55,000, which is a 10% increase, and you sell it, after repaying me the $45,000, you still make a net profit of $10,000. This means your $5,000 principal has effectively doubled.
However, if Bitcoin drops to $45,000, you will face a problem; the remaining value is only enough to repay the money I lent you. So even though it has only dropped by 10%, under 10x leverage, your own $5,000 is essentially wiped out.
At this point, if you say you are sure the price will go back up, and you do not sell, can you hold on? Definitely not. Your own money can hold on, but the money I lent you is mine; why should I hold on with you? If the price does not recover, how will you repay me? Therefore, I have the right to sell the coins on your behalf and take my $45,000 directly. Even if the sale is slow and Bitcoin drops to $44,000, selling Bitcoin means not only do you lose everything, but you also owe me $1,000. This $1,000 is a debt that you must repay; this is what is known as liquidation.
At this point, if you do not want to be liquidated, you only have one choice, which is to add margin. For example, if you add another $5,000 to your account, then the cash plus the value of the Bitcoin will exceed $45,000 again, and I will be reassured.
As an investor who has been in the cryptocurrency space for many years, I am willing to share my experiences and insights with you. If you are interested in the cryptocurrency world but do not know how to get started, feel free to follow me, click on my profile picture to see the images, and explore the mysteries of the cryptocurrency world and its future possibilities with me.
