What is Liquidation in Crypto, Types, Process and Stages

Bittime – Liquidation is a familiar term in the crypto ecosystem. However, what does liquidation actually mean? Is it the same as stock liquidation in general? The following is a complete explanation.

What Is Liquidation in Crypto?

Liquidation in a crypto context has a slightly different meaning compared to liquidation in a traditional business.

If in traditional business, liquidation refers to the process of selling all or most of a company's assets to pay off debts, then in crypto, liquidation often refers to the forced closure of a trading position.

Why does liquidation occur? Liquidation in crypto trading usually occurs when a trader uses leverage (debt) to increase potential profits.

If the asset price moves contrary to the trader's prediction, the value of the collateral (margin) deposited will continue to decrease. When the margin value reaches a certain level (margin call), the trading position will be forcibly closed by the trading platform to prevent further losses.

How is it different from crypto project liquidation? Apart from liquidation of trading positions, the term liquidation can also refer to a condition where a crypto project experiences complete failure and the development team decides to terminate the project. In this case, the project token will usually lose all its value.

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Types of Liquidation

There are several types of liquidation. To better understand it, below we explain in more detail each type of liquidation.

• Margin Liquidation: The most common type of liquidation in crypto trading. As previously explained, margin liquidation occurs when a trader's margin value falls below a specified level.
• Project Liquidation: Liquidation occurs when a crypto project fails and the development team decides to terminate the project.

Liquidation Rules

Liquidation rules vary greatly from one trading platform to another. However, in general, liquidation rules include the following:

• Margin Level: Each trading platform has different margin levels. If a trader's margin value falls below this level, then the trading position will be liquidated.
• Liquidation Price: The price at which a trading position will be liquidated.
• Liquidation Procedure: Procedures that will be carried out by the trading platform when liquidation occurs, such as the order of liquidation and the fees charged.

Liquidation Process and Stages

The liquidation process can generally be divided into several stages:

• Margin Call: When a trader's margin value falls below a specified level, the trading platform will send a margin call notification.
• Position Closing: If the trader does not add margin within the specified time, the trading platform will automatically close the trading position at the current market price.
• Results Distribution: The proceeds from the liquidation will be used to pay off the trader's debt to the trading platform. If there is a remainder, the remaining funds will be returned to the trader.

How to Avoid Liquidation in Crypto Trading

Understanding liquidation risk is an important step in crypto trading. Here are some strategies to avoid liquidation:

1. Good Risk Management

• Recognize Leverage: Fully understand how leverage works and the risks associated with it.
• Set Position Size: Don't open a position that is too large compared to your capital.
• Use Stop-Loss Orders: Stop-loss orders can help limit losses if the price moves against you.
• Portfolio Diversification: Don't put all your eggs in one basket. Diversifying your investments can reduce risk.

2. Careful Market Monitoring

• Follow News and Analysis: Stay updated with market developments and news related to the crypto assets you trade.
• Active Risk Management: Monitor your positions regularly and adjust them according to market changes.

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3. Using Risk Management Tools

• Stop-Loss Order: As mentioned, stop-loss orders can help limit losses.
• Take-Profit Order: Use a take-profit order to secure profits when the price reaches your target.
• Trailing Stop-Loss: This is a type of stop-loss order that follows price movements, helping to protect profits while still allowing you to follow the trend.

4. Education and Experience

• Learn Trading Basics: Understand basic concepts such as leverage, margin, and order types.
• Simulate Trading: Use a demo account to practice before using real money.
• Emotion Management: Avoid making impulsive decisions based on emotions.

Conclusion

Liquidation is a mechanism used by trading platforms to protect themselves from the risk of loss due to fluctuations in crypto asset prices. Although liquidation can be unpleasant for traders, this mechanism is very important to maintain market stability.

How to Buy Crypto on Bittime

You can buy and sell crypto assets easily and safely via Bittime. Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti. 

To be able to buy crypto assets on Bittime, make sure you have registered and completed identity verification. Apart from that, also ensure you have sufficient balance by depositing some funds into your wallet. For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application. Study Complete Guide How to Buy Crypto on Bittime. 

Monitor graphic movement of Bitcoin (BTC) price, Ethereum (ETH), Solana (SOL), and other cryptos to find out today's crypto market trends in real-time on Bittime.