⚖️What is a Liquidation?

First off, what is a liquidation? In simple terms, a liquidation is the forced selling of a trader’s position for cash or a cash equivalent when the trader cannot meet a margin requirement (or the value of capital the trader had to supply to be able to borrow).

Forced liquidations in crypto occur when traders take leveraged positions via derivatives such as margin trading, leveraged tokens, and futures contracts with borrowed capital to multiply their gains. In order to hedge these positions, the trader must provide initial capital, the margin deposit (aka collateral).

If a trader does not provide enough capital to hedge the position and the market moves against the expected position, the collateral is liquidated. The larger the position and the more leveraged it is, the more likely it is to be liquidated.