When an exchange automatically closes out your position because you’ve lost almost all your money, is Liquidation in crypto. It happens during futures trading when you use leverage and the market moves against you. It’s like a shut-down in order to keep you from losing more than you have.
Key Takeaways
- Liquation is a safety switch for the exchange that can wipe out your trade.
- It happens when your losses use up your initial investment.
- Using less leverage and setting stop-losses are the best ways to avoid it.
Introduction
Cryptocurrency futures trading is exciting. It gives you a chance to earn higher profits. But it comes with higher risks. The biggest risk for a new trader is liquidation.
If you don’t understand liquidation, you can lose your money very quickly. This is especially true when you use leverage, which is like borrowing money to trade. This guide will explain liquidation in simple terms. Knowing this could save you from a major loss when you use platforms like the btzo app.
What is Liquidation in Crypto Futures Trading?
When you buy a futures position using leverage, you’re putting a small amount of your own money (called “margin”) behind a much larger position.
The exchange needs you to have enough skin in the game. If your trade starts losing money, those losses are taken from your margin.
Liquidation is the point where your losses are so big that you’ve almost lost your entire margin. To prevent you from going into debt, the exchange steps in and forcefully closes your trade.
There are two ways this can happen:
1.Partial Liquidation:
The exchange closes just part of your trade to bring your account back to a safe level. It’s a warning.
2. Full Liquidation:
The exchange closes your entire trade. All the margin you used for that trade is gone.
How Does Liquidation Work in Futures Trading?
Let’s follow the steps that lead to liquidation.
1. You Open a Trade with Leverage
- Example: You use $100 of your own money.
- You apply 10x leverage.
- You now control a $1,000 position in Bitcoin.
2. The Market Moves Against You
- You bet the price would go up (this is called a “long” position).
- Instead, the price of Bitcoin starts falling.
3. Your Losses Grow
- As the price drops, the value of your $1,000 position decreases.
- These losses are subtracted from your initial $100.
4. The Liquidation Price is Hit
- Every trade has a “liquidation price.” You can see it on your screen in the btzo futures interface.
- It’s the price where your remaining money is just enough to meet the exchange’s minimum requirement.
- If the market price hits this level…
5. Your Position is Liquidated
- The exchange’s system automatically closes your trade.
- Your initial $100 is used to cover the losses and is gone.
A Simple Example:
- Your money: $100
- Leverage: 10x
- Total trade size: $1,000
- You go “LONG” on Bitcoin.
If the price of Bitcoin falls 10%, your $1,000 trade loses $100. This wipes out your entire $100 margin. The exchange will liquidate your position to ensure you don’t lose more than you put in. In reality, they will liquidate you just before your $100 is completely gone to be safe.
How to Avoid Liquidation in Crypto Futures Trading
You can’t avoid losses in trading, but you can definitely avoid liquidation. Here’s how.
1. Use a Stop-Loss Order (Your Best Friend)
- A stop-loss is an order you set to automatically sell your position at a specific price.
- You decide your maximum loss in advance (e.g., 20% of your money).
- This closes the trade safely before it ever gets near the liquidation price.
2. Don’t Use Max Leverage
- High leverage (like 50x or 100x) is dangerous.
- It makes your liquidation price very close to your entry price.
- A tiny price move against you can wipe you out.
- Smart move: Use low leverage (like 3x-5x). It gives your trade room to breathe.
3. Watch Your Trades and Add Margin
- Don’t just open a trade and forget it.
- Check your margin level and liquidation price regularly in your btzo app or btzo website.
- If a trade is going against you, you can add more funds to it. This is called “adding margin.” It lowers your liquidation price and can help you survive the dip.
Wrap up
Let’s be clear: Liquidation in crypto is about risk management. It’s what happens when a leveraged trade goes bad. The key to avoiding it is to be careful and use the tools available to you.
Always use a stop-loss. Be smart with leverage. And never invest funds that you cannot afford to lose. Being aware of this is the start to becoming a smarter trader.
Ready to practice safe trading? Explore BTZO Futures to see how liquidation works in real-time without risking real money.