Preface

In the world of cryptocurrency trading, opportunities for profit are limitless, but risks are also present in every leveraged trade. Many newcomers and high-leverage traders experience liquidation as a harsh lesson in market realities.

What Is Liquidation?

Liquidation is one of the most serious risks in leveraged trading. It occurs when your account margin drops below the required level to support your open positions, prompting the exchange to forcibly close those positions to limit further losses. As a result, all your holdings are sold off, and your principal is nearly wiped out. This commonly happens in the following scenarios:

• Cryptocurrency perpetual futures trading
• Margin trading

For example: If you take a 10x leveraged long position on BTC and BTC’s price falls by 10%, your principal is wiped out and your position is forcibly closed.

How Liquidation Works

In the derivatives market, every leveraged position must maintain a certain maintenance margin ratio. When the market price nears your liquidation price and your margin falls below this threshold, the system will automatically initiate liquidation. The basic process works as follows:

1. Open a position: You enter the market with leverage to establish a position.
2. Market volatility: The price moves against your position.
3. Margin shortfall: Your account balance drops below the maintenance margin requirement.
4. Forced liquidation: The exchange sells your position to prevent further losses.

Key Causes of Liquidation

1. Excessive leverage
   The more leverage you use, the closer your liquidation price is to your entry point, greatly amplifying your risk.
2. No stop-loss in place
   Many traders experience liquidation because they refuse to cut losses, resulting in positions running deep in the red and eventually triggering a forced liquidation by the system.
3. Highly volatile cryptocurrencies
   Low market capitalization coins or meme coins can swing by double digits within minutes, easily wiping out your margin.
4. Overreliance on market sentiment
   If the majority of the market is positioned the same way, it often signals a looming wave of liquidations. When sentiment changes, a wave of liquidations may occur.

Real-World Consequences of Liquidation

1. Capital completely wiped out
   Your principal will be liquidated, and in extreme cases, you may even incur negative balances, depending on platform rules.
2. Significant psychological toll
   Liquidation not only deals a financial blow but can also shatter your trading confidence, making it difficult to trade rationally afterward.
3. Impact on credit and trading records
   On centralized platforms, frequent liquidation events can affect your ability to access higher leverage or VIP privileges.

How to Avoid Liquidation?

• Use leverage conservatively: For beginners, keeping leverage within 2–3x is safer.
• Set clear stop-losses: Rationally define your stop-loss range to avoid holding losing trades until liquidation.
• Trade stable and highly liquid assets: Avoid extremely volatile or illiquid altcoins.
• Use isolated margin rather than Cross Margin: This limits potential losses to a single position, protecting your entire account balance from a single liquidation event.
• Practice disciplined risk management: Avoid concentrating all funds in a single position or relying exclusively on one strategy.
• Maintain a margin buffer: Do not let your account balance approach the liquidation threshold.

How Is Liquidation Handled Differently in Web3?

On decentralized trading platforms (like GMX, dYdX, and Perpetual Protocol), liquidation still occurs. The process is transparent and enforced by smart contracts. Users can monitor their margin status and liquidation levels directly on-chain in real time, reducing the risks of non-transparent operations. However, this also places full responsibility for risk management and decision-making on the user—there’s no customer service or platform backstop, and once a liquidation happens, the loss is final.

If you’re interested in learning more about Web3, click to register: https://www.gate.com/

Summary

In the fast-moving, opportunity-rich, and high-risk world of crypto, liquidation serves as a constant reminder: markets are neutral, and leverage carries significant risk. Every Web3 investor needs to recognize that it’s not about controlling the market—it’s about the market teaching us to respect risk.