Liquidation in Crypto: What It Is, Why It Happens, and How to Avoid It

When you trade crypto with liquidation, the forced closing of a leveraged position when losses hit a critical point. Also known as margin call, it’s what happens when your trade goes so far against you that the exchange has no choice but to shut it down to protect itself. This isn’t some rare edge case—it’s a daily reality for traders using leverage, borrowed funds to amplify trading positions. It’s the engine behind big wins and even bigger losses. Most people think liquidation only happens in wild market crashes, but the truth? It often hits during quiet hours, when volatility is low and traders get complacent. A 5% dip in a highly leveraged position can be enough to trigger it.

Margin trading, the practice of borrowing capital to increase exposure to an asset. It’s how you can control $10,000 worth of Bitcoin with just $1,000 of your own money. Sounds great—until the market moves against you. Exchanges set a liquidation price, the exact price at which your position will be automatically closed. If you’re using 10x leverage, that price might only be 10% below your entry. No room for error. Look at the liquidation of traders during the 2022 Terra collapse or the 2023 FTX meltdown. Thousands lost everything—not because they picked the wrong coin, but because they didn’t understand how close to the edge they were standing.

It’s not just about high leverage. Poor risk management, ignoring stop-losses, and not tracking funding rates all feed into liquidation risk. Some traders think they can "wait it out," but exchanges don’t wait. They don’t care if you believe the price will bounce. If your collateral falls below the maintenance margin, the system closes you out—fast. Even stablecoins aren’t safe. A sudden drop in USDT’s peg or a liquidity crunch on a DEX can trigger cascading liquidations across the market.

You’ll find posts here about failed airdrops, abandoned projects, and exchanges that vanished overnight. But behind every one of those stories, there’s often a trader who lost money not because the project was a scam—but because they used too much leverage and got liquidated before they could even react. This collection doesn’t just show you what went wrong. It shows you how to avoid becoming the next example.