{"id":"liquidation","version":1,"language":"en","title":"Liquidation","hidden":false,"content":"**Liquidation** or Crypto liquidation is the process of forced closing a trader's positions in the [cryptocurrency](https://iq.wiki/wiki/cryptocurrency) market. It occurs when a trader's margin account can no longer support their open positions due to significant losses or a lack of sufficient margin to meet the maintenance requirements.[\\[5\\]](#cite-id-9gynvjzi19e)  \n$$widget0 [YOUTUBE@VID](_exnGqJWR6k)$$  \nIf the market moves against the [leveraged](https://iq.wiki/wiki/leverage) position to a large degree, the user may lose the entire [collateral](https://iq.wiki/wiki/collateral) (or initial margin) and their position could be liquidated. In other words, the initial capital input will be forfeited to the exchange. Closing the positions helps ensure that the trader does not accumulate more debt and that the [exchange](https://iq.wiki/wiki/decentralized-exchange) can recover any outstanding funds.[\\[6\\]](#cite-id-9gynvjzi19e)  \n  \n# Overview  \n  \nTo initiate crypto liquidation, the timeframe can differ substantially based on the type of exchange being used. On centralized exchanges (CEX), liquidation can happen almost instantly, taking anywhere from a few seconds to several minutes. This expedited process is possible due to strict margin requirements and the employment of advanced algorithms that incessantly monitor positions to instigate liquidation when necessary.  \n  \nOn the other hand, liquidations on [decentralized exchanges (DEX)](https://iq.wiki/wiki/decentralized-exchange) might experience a protracted duration. In DEX environments, traders retain the responsibility of managing their margins. Consequently, closing a position can necessitate a waiting period to find a matching buyer or seller to fulfill the order.  \n  \nAn essential concept in this realm is the 'liquidation price,' which refers to the asset price threshold at which the exchange automatically closes a trader's position due to the failure to satisfy margin prerequisites. This price is subject to fluctuations based on several factors, including the degree of leverage utilized, margin stipulations, and the current market climate.  \n  \nMarket volatility is a key determinant of how often the liquidation price changes. In volatile market conditions, the liquidation price is likely to adjust more frequently. In contrast, during more stable market times, the liquidation price tends to remain relatively steady.[\\[10\\]](#cite-id-34j6yzrly3v)  \n  \n# Types of Liquidations  \n  \n## Partial Liquidation  \n  \nPartial liquidation involves closing out a portion of the users' position to reduce risk exposure. This type of liquidation is usually voluntary, and the trader does this not to lose his whole trading [stake](https://iq.wiki/wiki/staking).[\\[3\\]](#cite-id-wdskhi89m2) For instance, a trader needs to liquidate their [Bitcoin](https://iq.wiki/wiki/bitcoin-btc) to cover a short position, or to meet other financial obligations. When this happens, the trader will usually sell their Bitcoin at the current market price, regardless of whether it’s above or below the original purchase price. However, in some cases, a trader may be forced to sell their Bitcoin at a price below the market rate. This may end up being the liquidation price, and it’s usually determined by the exchange on which the Bitcoin is being sold.  \n  \nWhen [Bitcoin](https://iq.wiki/wiki/bitcoin) fell below 43k, over $812 million of crypto futures were liquidated, resulting in large losses for long crypto traders. This happened because of a partial or total loss of initial margin for traders.[\\[12\\]](#cite-id-hqxbt5p4q4s)  \n  \n## Forced Liquidation  \n  \nA forced liquidation, also known as total liquidation happens when a trader does not or cannot meet the 'margin call' for a [leveraged](https://iq.wiki/wiki/leverage) position. It involves the selling of the entire trading balance to cover losses. In other words, they don’t have enough funds to keep the position open. In such situations, the exchange will automatically close out the trader’s positions to cover the losses.  \n  \nForced liquidation usually prompts an additional liquidation fee, which has been put in place to encourage traders to manually close positions before they’re liquidated. In some severe cases, liquidation may lead to a negative balance. Some exchanges cover such losses by employing different methods, of which settling them with insurance funds is one of the methods.[\\[7\\]](#cite-id-1hst1qqbsyq)[\\[9\\]](#cite-id-d8b9dbexdr8)  \n  \nFor instance, $190 million has been liquidated on the [BitMex](https://iq.wiki/wiki/bitmex). Even though the exchange offers as much as 100 times [leverage](https://iq.wiki/wiki/leverage) on futures contracts, users are at risk of facing margin calls on what’s borrowed, which can end up leading to the liquidation of their position.[\\[14\\]](#cite-id-hjnxbuegbub)  \n  \n## Long and Short Liquidations  \n  \nThe terms 'long' and 'short' simply refer to what type of trade an investor is making. Short trades are bets against price rises, and so short liquidations refer to liquidations that happen on these types of trades. For instance, Deribit had a dominant short liquidation rate of 56.32%. Long trades are those that expect price levels to rise, and long liquidations are those that occur on such trades. For instance, [OKX](https://iq.wiki/wiki/okx) saw the highest percentage of long liquidations at 98.2%.[\\[7\\]](#cite-id-1hst1qqbsyq)[\\[13\\]](#cite-id-60zy013fm7m)  \n  \n# Liquidation Ratio  \n  \nA liquidation ratio is the level of [collateral](https://iq.wiki/wiki/collateral) ratio at which a partial liquidation of collateral is triggered. It represents the situation in which the collateral ratio drops to 125% and [DAG](https://iq.wiki/wiki/directed-acyclic-graph-dag) executes a partial liquidation of the user’s collateral.[\\[6\\]](#cite-id-pkgtcp864za)  \n  \n## Collateralization in DeFi  \n  \nIn DeFi, users can lock up a certain amount of cryptocurrency as [collateral](https://iq.wiki/wiki/collateral) to borrow other assets, typically [stablecoins](https://iq.wiki/wiki/stablecoin) like [DAI](https://iq.wiki/wiki/dai) or [USDC](https://iq.wiki/wiki/usdc). [Collateralization ratio](https://iq.wiki/wiki/collateralization-ratio) (or, Collateral %) = Value of collateral/Value of borrowed assets.  \n  \n## Liquidation Threshold  \n  \nDeFi protocols set a liquidation threshold, also known as the liquidation ratio, which represents the minimum collateralization level a user's position must maintain.  \n  \nIf the value of the collateral falls below this threshold due to market price fluctuations, the user's position becomes vulnerable to liquidation.  \n  \n# Liquidation in Margin & Future Tradings  \n  \n## Margin Trading/Margin Call  \n  \nBefore the actual liquidation occurs, there is often a margin call mechanism in place. When a user's position approaches the liquidation threshold, they receive a warning or margin call notification. The margin call allows users to add more [collateral](https://iq.wiki/wiki/collateral) to their position to bring it back above the liquidation threshold and avoid liquidation.  \n$$widget0 [YOUTUBE@VID](XNW-3SbQwx8)$$  \nThe specific liquidation ratio can vary from one [DeFi](https://iq.wiki/wiki/defi) protocol to another. Lower liquidation ratios provide less room for price fluctuations, which can be riskier for borrowers. Higher liquidation ratios offer more flexibility but come with the trade-off of requiring users to lock up more collateral.[\\[7\\]](#cite-id-1hst1qqbsyq)  \n  \n## Futures Trading  \n  \nThe significance of liquidation in futures trading helps maintain the stability and integrity of the market by mitigating the risk of default. By enforcing timely liquidation, exchanges ensure that traders meet their obligations and prevent potential cascading liquidations that could impact the entire market.[\\[7\\]](#cite-id-1hst1qqbsyq)  \n$$widget0 [YOUTUBE@VID](Z3eYoipO9SI)$$  \n  \n# Features  \n  \n## Risk Mitigation  \n  \nLiquidation serves as a risk management tool, reducing the potential for defaults and losses for lenders. When the value of [collateral](https://iq.wiki/wiki/collateral) falls, liquidation helps in recouping the borrowed assets to prevent insolvency.  \n  \n## Market Efficiency  \n  \nBy liquidating undercollateralized positions, DeFi platforms maintain a balance between supply and demand for assets, which contributes to market efficiency.  \n  \n## Liquidity Provision  \n  \nLiquidation events provide opportunities for users to acquire assets at discounted prices, increasing market [liquidity](https://iq.wiki/wiki/liquidity-pool).  \n  \n# Liquidation Risk Management  \n  \n$$widget0 [YOUTUBE@VID](Zufwv7nf_-Y)$$  \n  \n## Coverage  \n  \nTo cover losses from bankrupt positions, certain cryptocurrency exchanges utilize various methods, one of which involves using insurance funds. These funds act as a form of protection for exchanges, allowing them to cover losses and allocate enough resources to compensate profitable traders.  \n  \nIn the event of bankruptcy, when the liquidation price surpasses the initial margin, the insurance fund will be used to absorb the loss, safeguarding crypto traders from acquiring a negative balance.[\\[7\\]](#cite-id-1hst1qqbsyq)  \n  \n## Stop Order  \n  \nStop Order aka, 'stop loss' or 'stop-market order,' is an order that you can place through a crypto exchange, telling the exchange to sell an asset when its price hits a certain point. It’s an essential piece of risk management for leveraged trading.  \n  \nInitially, the user must know the stop price- the price at which the order will go into effect; the selling price- the price at which they'd be willing to sell the asset, and the size- how much of the asset the user wants to sell.  \n![image](https://ipfs.everipedia.org/ipfs/QmbWMwFeYmownLHFcvursX1JEsH595ufYQ4GzfoDPygKpw)  \nIf the asset hits the stop price, the exchange will automatically execute the order and sell the amount stated at the price stated. Stop losses are designed to limit potential losses. It’s generally set between 2% and 5% of the users' trade size. Additionally, per-trade losses should be kept below 1.5% of the entire account size.[\\[11\\]](#cite-id-ue1192dz0g)  \n  \n## Manual Margin Ratio Monitoring  \n  \nThe user can also keep track of losses manually by knowing the percentage the market needs to move against the position for it to be liquidated.  \nLiquidation % = 100 / Leverage  \n  \nFor instance, say that the user is opening a position with an initial margin of $100 and leverage of 4x, to create a position of $400. Using the above formula,  \nLiquidation % = 100 / 4 = 25%  \n  \nFrom the above result, the user may face liquidation if the price of the asset moves 25% against the user's position. So, liquidation would occur in this scenario if $400 position moves down to a value of $300.[\\[11\\]](#cite-id-ue1192dz0g)","summary":"Liquidation is the forced closure of a trader's positions in the cryptocurrency market when their margin account can't support their losses or maintenance requirements.","categories":[{"id":"defi","title":"Decentralized Finance"}],"promoted":0,"tags":[{"id":"Glossary"}],"metadata":[{"id":"references","value":"[{\"id\":\"a4gcr81la2b\",\"url\":\"https://www.investopedia.com/terms/l/liquidation.asp\",\"description\":\"liquidation\",\"timestamp\":1693949549926},{\"id\":\"yf5l9d3llfg\",\"url\":\"https://www.investopedia.com/terms/l/liquidation-value.asp\",\"description\":\"liquidation value\",\"timestamp\":1693949588369},{\"id\":\"wdskhi89m2\",\"url\":\"https://www.investopedia.com/terms/v/voluntary-liquidation.asp\",\"description\":\"voluntary liquidation\",\"timestamp\":1693949698617},{\"id\":\"o35aonzhzhd\",\"url\":\"https://www.investopedia.com/terms/l/liquidateddamages.asp\",\"description\":\"liquidated damages\",\"timestamp\":1693949757740},{\"id\":\"9gynvjzi19e\",\"url\":\"https://www.coinglass.com/LiquidationData#:~:text=Crypto%20liquidation%20refers%20to%20the,to%20meet%20the%20maintenance%20requirements.\",\"description\":\"crypto liquidation\",\"timestamp\":1693950835638},{\"id\":\"pkgtcp864za\",\"url\":\"https://medium.com/daground/what-is-liquidation-ratio-d36c4ba8bf26\",\"description\":\"liquidation ratio\",\"timestamp\":1693988529665},{\"id\":\"1hst1qqbsyq\",\"url\":\"https://www.trality.com/blog/what-is-liquidation-in-crypto\",\"description\":\"types\",\"timestamp\":1694072553047},{\"id\":\"jizp9pyz2dc\",\"url\":\"https://www.trality.com/blog/what-is-liquidation-in-crypto\",\"description\":\"crypto margin trading liquidation\",\"timestamp\":1694073536606},{\"id\":\"d8b9dbexdr8\",\"url\":\"https://academy.binance.com/en/glossary/forced-liquidation\",\"description\":\"forced liquidation\",\"timestamp\":1694084112719},{\"id\":\"34j6yzrly3v\",\"url\":\"https://mudrex.com/blog/what-is-crypto-liquidation/\",\"description\":\"time for a crytpo to liquidate\",\"timestamp\":1694084496315},{\"id\":\"ue1192dz0g\",\"url\":\"https://learn.bybit.com/trading/what-is-crypto-liquidation/\",\"description\":\"avoiding liquidation\",\"timestamp\":1694084699090},{\"id\":\"hqxbt5p4q4s\",\"url\":\"https://learn.bybit.com/trading/what-is-crypto-liquidation/\",\"description\":\"btc liquidation\",\"timestamp\":1694085032092},{\"id\":\"60zy013fm7m\",\"url\":\"https://www.binance.com/en-NG/feed/post/987264#:~:text=Analyzing%20the%20liquidation%20data%20from,long%20liquidation%20rate%20of%2091.97%25.\",\"description\":\"shirt & long liquidations examples\",\"timestamp\":1695330831824},{\"id\":\"hjnxbuegbub\",\"url\":\"https://www.aljazeera.com/economy/2020/3/9/crypto-burn-traders-stung-by-forced-liquidations\",\"description\":\"bitmex forced liquidation\",\"timestamp\":1695331191114}]"},{"id":"previous_cid","value":"QmayrrqdHEL5Hpd4Xq1mkeSLT4mtFtz1curTSoeDPE6WHL"}],"user":{"id":"0x6753061a4cffbc0A617e57E956A298D88702a94B"},"author":{"id":"0xa99437c1445649AA316f7CC43dFf3E6e210a5F23","profile":{"username":"Karishma","avatar":"Qmc7ek3BpBjheHQ4knBSdPt6UJEnbJQQmbe8iNEPW2L88F"}},"media":[{"name":"_exnGqJWR6k","id":"https://www.youtube.com/watch?v=_exnGqJWR6k","size":"0","type":null,"source":"YOUTUBE"},{"name":"XNW-3SbQwx8","id":"https://www.youtube.com/watch?v=XNW-3SbQwx8","size":"0","type":null,"source":"YOUTUBE"},{"name":"Zufwv7nf_-Y","id":"https://www.youtube.com/watch?v=Zufwv7nf_-Y","size":"0","type":null,"source":"YOUTUBE"},{"name":"Z3eYoipO9SI","id":"https://www.youtube.com/watch?v=Z3eYoipO9SI","size":"0","type":null,"source":"YOUTUBE"},{"name":"image","id":"Qmc8SJ47RMkEWZZdqXEy6UG1TaApJ2ce6nHGD9oRAFQmK1","size":"0.14","type":"GALLERY","source":"IPFS_IMG"},{"name":"image","id":"QmbWMwFeYmownLHFcvursX1JEsH595ufYQ4GzfoDPygKpw","size":"0.03","type":"GALLERY","source":"IPFS_IMG"}],"views":40,"events":[],"ipfs":"QmayrrqdHEL5Hpd4Xq1mkeSLT4mtFtz1curTSoeDPE6WHL","transactionHash":"0xee689e21656f57b16e78b7e454c2e4615e4e2859a462cd385aeec4f671cf35b1","created":"2023-09-05T22:02:35.881Z","updated":"2023-09-21T21:34:20.686Z","images":[{"id":"QmTPQENcLxFqDzmbaPQqqLyjnNyHnhBimixDHdwsdgayQ7","type":"image/jpeg, image/png"}],"linkedWikis":null}