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Crypto Terms:  Letter L
Jun 19, 2023 |
updated Apr 02, 2024

What is Liquidation?

Liquidation Meaning:
Liquidation - conversion of assets for fiat or its equivalent stablecoins.
2 minutes

Let's find out Liquidation meaning, definition in crypto, what is Liquidation, and all other detailed facts.

Liquidation is the conversion of assets for fiat or its equivalent stablecoins, such as Tether (USDT). The process of liquidation may be forced or voluntary. During forced liquidation, the assets are automatically converted once the trade reaches certain conditions.

Forced liquidation happens when a trader’s position in margin trading closes automatically after failing to maintain the requirements of leveraged positions. Leverage is a crucial part of margin trading as it is the multiple of the borrowed funds that traders use to boost their market positions. The higher the leverage prices, the lower the liquidation price range.

If a person wants to margin trade ETH/USDC and has $50, they have to borrow $450 to be granted a 10x leverage. If ETH experiences a 10% dip, the investment will be considered gone and the borrowed funds will be heavily affected by the losses. To avoid such risks, the lender can convert ETH to USDC to liquidate the margin trade.

Forced liquidation may occur before the trader’s actual share has been reduced. Binance and other margin trading platforms allow users to see what the liquidation price is before they enter a leverage position. The factors accounted for in the liquidation price are the position size, account balance, and the leveraged amount.

Voluntary liquidation occurs when the trader opts to cash out their crypto assets for any reason and is not automated. Liquidation may also occur in futures markets.