Yellow Capital Blog/Crypto Market Making/What are crypto liquidations?

What are crypto liquidations?

Sunday, February 04, 2024

Crypto liquidation is simply selling off a trader's assets, typically in cryptocurrencies. A key goal of liquidate crypto is to cover losses or meet the requirements for margin trading. Such a solution can be effective if the value of trader’s positions falls to a level where they no longer meet the minimum collateral requirement of the platform/lender. It is also quite often associated with margin trading since, in both cases, traders will borrow crypto to boost their trading positions.

​But even if the process looks simple, learning as much as possible is crucial. Our guide can help you with that since here you will find an explanation of what is a liquidating trade at the beginning and the main reasons why readers use it. After that, we’ll go over the types of liquidation and the most effective strategies to avoid them. Moreover, we’ll mainly focus on each of the most popular systems so you can achieve your investment goals while minimizing financial risks.

Why do crypto traders use leverage?

Margin liquidation and leverage training are the same things. Borrowing funds ensures a simple control of a more prominent position size with less capital and increases the traders’ exposure to the market. It can be enhanced for profit even if it can introduce higher risks. Among the key reasons for using this option are:

  • Simple increasing of the potential returns on your investments.
  • ​​More effective control of the more prominent positions with a fraction of the capital.
  • Opportunity to exploit market fluctuations and profit from all the trends (upward and downward).
  • To capitalize on falling asset values (particularly in bear markets).
  • To diversify the investment portfolio with any capital.
  • As a toll for offsetting potential losses in a portfolio.
  • ​​To trade more prominent positions than your actual account balance!

In most cases, liquidated crypto is an excellent idea since it can ensure many features. However, remember the risks associated with leverage. It is crucial to use risk management strategies, such as setting stop-loss orders, to minimize the impact of adverse market tendencies.

How do crypto liquidations happen?

Now that you know what does liquidation mean in crypto, it's the right time to learn more about how it works:

  • To amplify the size of the positions, traders borrow funds from unique platforms that provide leverage options. This simple action allows traders to control positions as the actual account balance and as much more significant.
  • ​After entering the leveraged position, the collateral will be required to cover all the potential losses.
  • A maintenance margin is required at every platform, so you must have this minimum amount to ensure the leveraged position will be open.
  • The market sell order will be executed automatically by the trading platform.
  • ​​​​Borrowed funds will be repaid, including any interest accrued during the trading period!

As a result of these actions, if the liquidation in crypto results in losses exceeding the trader's remaining equity, the account can be closed. In this situation, the balance will be negative. However, some platforms use unique mechanisms to distribute the losses automatically among other traders.

What is the liquidation price?

One more important thing to learn is what is liquidation price. Simply speaking, this is the price where the exchange closes a trader's position automatically to prevent additional losses. The liquidation price will determine the level at which your losses would equal the initial margin deposited (excluding fees).

Types of liquidation

You know what is liquidation in crypto, but for a better understanding of this procedure and finding the best solution, it's crucial to learn about possible types. There are two main types - partial and total. More details about each of them you will find below.

Partial liquidation

This concept means that cashing will be used as a simple way to prevent the entire trading stake loss. That means liquidation will occur before the initial margin's depletion, and in most cases, this solution is voluntary. However, sometimes, the lender can force it if there is a predefined agreement between it and the trader. In this case, the position will be closed before the capital is depleted. Such actions ensure offsetting of the extra fee.

Total liquidation

Sometimes, total liquidation is the only solution for the situation. In this case, an entire balance will be sold to offset losses. We can see total liquidation when a lender closes a position to save their capital. However, such a situation is terrible for traders since they can lose their entire capital and end up with a negative balance.

How to avoid liquidation?

By this point, you can confidently explain what is liquidated in crypto and some of its pros and cons for traders. However, there are still so many things to learn before making a final decision about this option. Use our recommendation to prevent liquidation and make your investment work. Find and use effective strategies and tools to ensure yourself long-term success.

​Also, we highly recommend you read other themed articles on our website and check out some simple tips below.

Determining the risk percentage

This is for sure one of the most effective methods to avoid liquidation. At its core is risk percentage. Due to this method, the trader will start by determining the amount of money he will spend on the trade. Another thing to consider is the percentage of your trading account you are willing to risk. Interesting that such simple actions will ensure the reduction of the risk. Our experts recommend you risk not more than 1%-3% of your account. In this case, you must lose 100 trades to lose everything. And even in a highly volatile crypto industry, such a scenario is improbable.

Always use a stop-loss

With the stop loss (SL) orders, you can prevent liquidation and increase the chances that investments will work. With the clear SLs, you can automatically ensure that your cryptos will be sold at specific levels. It can minimize the risks and losses. But it's crucial not to set a stop loss too close to the entry point or too far. The simplest example of such a strategy is setting a stop-loss at 3% under the entry price. If the crypto market turns, these settings will limit your losses.

Entrust your funds to Yellow Capital

By entrusting your cryptos to the professional fund managers from Yellow Capital you will save time and money since you don't even need to look for the liquidation price meaning. We will employ strategies to mitigate risks, optimize returns, and avoid liquidation. We know how to make your investment work through diversification and effective strategy implementation. Work with us to protect your investment from sudden and significant market fluctuations and get the best results.

Final words

Now that you know the liquidated meaning crypto and understand its key reasons and types, you can manage risks more effectively. But to get even better results, we highly recommend you work with Yellow Capital since it can provide a stress-free investment experience. By becoming our client, you can easily benefit from our expertise without actively managing your investments and still getting high rewards. So contact us today to avoid liquidation tomorrow!

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Hi, I am Alexis Yellow

Chairman of Yellow Capital

Are you ready for a wild career transition? I went from launching rockets into outer space at the European Space Center to helping Token Issuers launch their Crypto Projects!

Yellow Capital provides advisory services, strategic investments, and prime crypto market making.

Join me on this journey as I share my experiences and expertise in the crypto world, and maybe we'll even launch a few successful projects together!

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