Liquidation in Crypto: What It Means and Why It Matters

When working with liquidation, the forced closing of a position when collateral falls below required levels. Also known as forced sale, it can happen on any leveraged platform. You’re dealing with liquidation, a process that directly impacts your capital.

Another common term is crypto liquidation, the specific mechanism used by crypto exchanges to close under‑collateralized positions. This phenomenon is tightly linked to a margin call, a warning that requires you to add more collateral or face forced closure. If the call is ignored, the exchange’s automated system initiates a liquidation, often using liquidation bots, software that scans for risky accounts and executes sell orders instantly. Together, these elements create a chain: margin call triggers liquidation bots, which execute the forced sale.

From a market perspective, exchange liquidation, the bulk clearing of positions by an exchange during extreme volatility can amplify price swings. When an exchange liquidates many contracts at once, it adds selling pressure, which can push prices lower and cause further liquidations— a feedback loop often referred to as a “liquidation cascade.” Understanding this cascade helps traders gauge risk during high‑volatility events.

Key Factors Behind Liquidations

Three attributes determine whether a position gets liquidated: collateral ratio, asset volatility, and the platform’s liquidation threshold. A low collateral ratio means you have little buffer against price drops. High volatility can erode that buffer quickly, especially for leveraged tokens. Finally, each exchange sets its own liquidation threshold—some trigger at 80% collateral, others at 95%—which directly influences how early a margin call appears.

Practical steps to avoid unwanted liquidation include: maintaining a healthy buffer above the exchange’s minimum, using stop‑loss orders to exit before a margin call, and monitoring volatility indexes for the assets you hold. Many traders also spread risk across multiple platforms to reduce exposure to any single exchange’s liquidation policy.

Below you’ll find detailed guides, reviews, and real‑world examples that break down each of these concepts, from how airdrops can be affected by liquidation events to step‑by‑step strategies for keeping your positions safe.