Liquidation happens when a leveraged trading position is forcibly closed because the trader no longer has enough collateral to support it.
How It Works
In leveraged trading, users borrow exposure by posting collateral. If the market moves against them and their margin falls below the required level, the exchange or protocol closes the position automatically.
Liquidations can happen quickly in crypto because prices move fast and markets trade around the clock.
Why It Matters In Crypto
Liquidation matters because it can accelerate volatility. When many traders are liquidated at once, forced buying or selling can push prices even further.
A practical example: if a trader opens a leveraged long position on Bitcoin and BTC falls sharply, the exchange may liquidate the position to prevent the account from going negative.