Can someone explain how liquidation works ?

Saint-loup

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Quote from: JeromeTash on October 25, 2023, 02:28:03 PM

In trading crypto, there are people who trade crypto derivatives or futures. In this kind of trading, people either short (predict that the Bitcoin might go down, so they get profits) or Long (predict that the Bitcoin might go down, so they get profits). On top of that, they use leverage (Borrowed funds). Once they open a position with leverage with funds in his account acting as collateral, a liquidation price is set. If the market price goes against the opened position beyond that liquidation price, the exchange's Liquidation engine will close the position and take out all the collateral the trader used for borrowing.

So in the case of the recent market uptrend, there are traders who opened short positions against Bitcoin and most of them probably had their liquidation prices set at 30K,33K, 35K depending on the leverage and entry prices. When the Bitcoin price rapidly moved upwards, the positions that had no stop losses got liquidated, leading to news of massive liquidations.

You don't need to trade deratives or futures to get liquidated actually. You just need to make margin trading with random (real) coins. Margin trading means you use borrowed funds that let you short or trade with a leverage. And if you are liquidated it's because your balance dedicated to the position in case of isolated margin trading or your overall account balance in case of cross margin trading is no longer sufficient to cover the loan. The exchange will then sell your funds in order to repay the loan.
That is to say if you are shorting BTC against USD for example, they will sell your collateral in order to buy back the BTCs borrowed you had sold in order to make your short trade.

Darker45

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Quote from: hd49728 on October 26, 2023, 05:46:52 AM

Quote from: NotATether on October 26, 2023, 03:06:48 AM

"liquidate" means somebody is selling their bitcoins (or other crypto) to an exchange. It doesn't actually mean the coins are destroyed, just that the exchange now possesses them as well as those of other customers who sold their coins.

Liquidate is not burning cryptocurrency so its total supply, circulating supply will not be affected by liquidation. By an exchange liquidation, cryptocurrency in a user account will be transferred to the exchange treasury or hot wallet and they own it, the user loses it. User get poorer significantly because with a forced liquidation, an user will lose big % of collateral. Exchange can get profit with it because usually after a crash, price will bounce.

The trader in a liquidation process doesn't just lose a % of his/her money, he/she loses it all. The platforms or exchanges don't just get a certain % in profit, the trader's money will go to them. And this isn't about the bounce after the crash or vice versa, this is about losing your position or your margin.

Quote from: BitcoinPanther on October 26, 2023, 03:54:39 PM

@OP a simple internet research about liquidation will show you that liquidation is when someone wanted to close his position in the market. It is where the investor sells his investment or part of his investment. This articles explain more about liquidation and how it works.

I think OP is referring more to forced liquidations rather than an intentional trader's decision to either stop-loss or take-profit. The latter may not even be liquidation in its strict sense. I think liquidation news aren't talking about amounts which are closed because the traders decided so. These news are referring to amounts forcedly liquidated by exchanges. Meaning, these are amounts lost because of the traders' wrong predictions or positions. If they short Bitcoin and the price rises, they're wrong and they lose their money.

BitcoinPanther

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@OP a simple internet research about liquidation will show you that liquidation is when someone wanted to close his position in the market. It is where the investor sells his investment or part of his investment. This articles explain more about liquidation and how it works.

Liquidate

It is even said that there are level of liquidation and this article explains what it is and how it works:

Liquidation Level: What it is, How it Works
Taking the sceen shot of the key takeaways of the article:

Coindesk also release an article about the meaning of liquidation and how to avoid it,

What Does Liquidation Mean and How to Avoid It?

acroman08

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Quote from: Darker45 on October 25, 2023, 08:13:35 PM

Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

Quote from: BIT-BENDER on October 25, 2023, 02:24:47 PM

Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

You are correct mate, and to explain with an example let say I own a housing property worth $10 million and I see of the house for cash then I have liquidated that my housing property.

This is wrong. OP is asking about liquidations which happen whenever the price of Bitcoin rallies.

This refers to margin or leverage trading. Liquidation means the platform or exchange you are using closes your position and takes your money away because you are already losing the margin. Meaning to say, you don't have money anymore to support your position.

In simple terms, if you predict that Bitcoin goes down and Bitcoin went up, you lost. Liquidation could happen, depending of course on your leverage. Thus, when there's a huge movement of Bitcoin whether up or down, there are ensuing news of liquidations.

yeah, your right, I think the OP is referring to "liquidation" that you and JeromTash explained, on the other hand I was thinking more of the general term of liquidation and didn't thought about what you guys explained. glad you guys could quickly clear it up.

Hamza2424

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Quote from: a298b112 on October 25, 2023, 01:58:16 PM

Every time when the price of BTC surges there will news articles reporting millions of dollars being liquidated. What exactly does it mean and how it works?

Hmm, I'm sure most of the Op's queries are already answered by fellow members, I just would like to add here from the trading point of view that if you do not have enough capital to service the volatility of the market and you're experienced users better not to go for the leverage trades, Spot market can also offer decent opportunities and massive rewards on it. It's just a timely thing, In a consolidating market the funding rates can be Headache as well.

OP drong anything else if you really want to ask freely, on the same time i think topic belongs to the trading section.

cryptoaddictchie

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Quote from: a298b112 on October 25, 2023, 01:58:16 PM

Every time when the price of BTC surges there will news articles reporting millions of dollars being liquidated. What exactly does it mean and how it works?

It means some of them have traded shorting the price of bitcoin and eventually bitcoin price incrases contradicting their bet price which makes them losses money "liquidated" thats the term often uses when you are loses in trading Future margin.

You could learn that online or even here for sure theres a thread explaining how future trading works.

hd49728

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Quote from: NotATether on October 26, 2023, 03:06:48 AM

"liquidate" means somebody is selling their bitcoins (or other crypto) to an exchange. It doesn't actually mean the coins are destroyed, just that the exchange now possesses them as well as those of other customers who sold their coins.

Liquidate is not burning cryptocurrency so its total supply, circulating supply will not be affected by liquidation. By an exchange liquidation, cryptocurrency in a user account will be transferred to the exchange treasury or hot wallet and they own it, the user loses it. User get poorer significantly because with a forced liquidation, an user will lose big % of collateral. Exchange can get profit with it because usually after a crash, price will bounce.

Quote

Exchanges can also liquidate their own coins by selling them to some other entity, and so on, the cycle continues.

Like FTX and Alameda Research?

Publictalk792

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When BTC price surges investors often borrow money to buy more. Liquidation occurs when the value of their investment falls below a certain level prmpting the lender to force the investor to sell their assets to repay their debt. This tends to cascade as more people get liquidated and leads to price drops. When a trader reached to the liquidation point the Exchange sell their Bitcoin or other assets in which he/she has made trade and pay it for borrowed funds.

NotATether

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"liquidate" means somebody is selling their bitcoins (or other crypto) to an exchange. It doesn't actually mean the coins are destroyed, just that the exchange now possesses them as well as those of other customers who sold their coins.

Exchanges can also liquidate their own coins by selling them to some other entity, and so on, the cycle continues.

FatFork

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Quote from: EL MOHA on October 25, 2023, 03:51:01 PM

This liquidity of a thing ...

OP asked about liquidation (in terms of trading), not liquidity. Don't try to explain things you don't understand yourself.

OcTradism

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Quote from: Darker45 on October 25, 2023, 08:13:35 PM

This is wrong. OP is asking about liquidations which happen whenever the price of Bitcoin rallies.

This refers to margin or leverage trading. Liquidation means the platform or exchange you are using closes your position and takes your money away because you are already losing the margin. Meaning to say, you don't have money anymore to support your position.

In simple terms, if you predict that Bitcoin goes down and Bitcoin went up, you lost. Liquidation could happen, depending of course on your leverage. Thus, when there's a huge movement of Bitcoin whether up or down, there are ensuing news of liquidations.

It is what OP asked. Liquidation for margin or leverage trading. It's not a question about liquidity.

Coinglass.com has three pages for liquidation information, table, charts.
Liquidation data (general): https://www.coinglass.com/LiquidationData
Liquidation Map: https://www.coinglass.com/pro/futures/LiquidationMap
Liquidation Heat Map: https://www.coinglass.com/pro/futures/LiquidationHeatMap

They have a page for Funding rate too.
https://www.coinglass.com/FundingRate

Darker45

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Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

Quote from: BIT-BENDER on October 25, 2023, 02:24:47 PM

Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

You are correct mate, and to explain with an example let say I own a housing property worth $10 million and I see of the house for cash then I have liquidated that my housing property.

This is wrong. OP is asking about liquidations which happen whenever the price of Bitcoin rallies.

This refers to margin or leverage trading. Liquidation means the platform or exchange you are using closes your position and takes your money away because you are already losing the margin. Meaning to say, you don't have money anymore to support your position.

In simple terms, if you predict that Bitcoin goes down and Bitcoin went up, you lost. Liquidation could happen, depending of course on your leverage. Thus, when there's a huge movement of Bitcoin whether up or down, there are ensuing news of liquidations.

hd49728

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Quote from: a298b112 on October 25, 2023, 01:58:16 PM

Every time when the price of BTC surges there will news articles reporting millions of dollars being liquidated. What exactly does it mean and how it works?

Liquidations will take majority of your collateral to the exchange and with forced liquidations that will be executed directly by exchange, you can not do anything. Before forced liquidations, you will receive Margin calls but I am sure most of people who have Margin calls will have forced liquidations from some of margin calls.

Liquidations will be based on formula of each exchange and the leverage you use for your gamble (trading with leverage).

When market price falls, people cut loss, price slips more and sometimes can appear Cascade effects, crashed and forced liquidations will appear massively on many centralized exchanges.

Forced Liquidation.
What does liquidation mean and how to avoid it?

Franctoshi

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Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it means that millions of dollars worth of assets were being sold and turned into cash.

I could be wrong but that is my understanding when someone says "Millions of dollars being liquidated". I also just want to add that you can search this up if you want more info about it, pretty sure there is tons of information out there that can properly and easily explain it to you.

You are right based on this angle of explanation, But I think the OP is talking about the liquidation of traders when the price surges or falls in price, so in other words when it comes to the trading world, liquidation can also be said to be when traders in the market who are longing or shorting a future contract or using leverage lose millions of dollars in the market when the market goes against them or reaches their set liquidation price.

EL MOHA

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This liquidity of a thing is something you need to read and understand base on your own perspective of it. But what I understand it to be is that the ability to buy and sell that particular coin is it’s liquidity. For example we will be saying something like bitcoin has more liquidity than altcoins, this is because whenever you wish to buy or sell any amount of bitcoin you will easily get a buyer or seller, but if it is the other coins you won’t get for the amount you wanted mostly if it is large amount.

We also sometimes say CEX like binance has more liquidity than DEX like Bisq because their more people to buy and sell on CEX than on DEX, and hence converting your coins to cash is easier their.

Oshosondy

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@JeromeTash is the one that is correct.

Assuming I use 5x leverage to short bitcoin at $27000, the liquidation price would be around $32400. If bitcoin increased to $32400, the funds traders used to open short at $27000 will be liquidated.

Assuming bitcoin price is at $35000, the funds of traders that long at $35000 will be liquidated around $28000 if the price of bitcoin fall.

The higher the leverage used, the closer the liquidation price to the market price.

That is the liquidation that the crypto news are referring to.

Broadanbig

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OP I once asked this same question as you did but I had to do my own research to know more about it. Although it is still diverse and broad a bit but I believe this little explanatory you have gotten here can help you a little bit to understand it in a better way. You should not only depend on answer here but rather do your own research to gain more broad knowledge about liquidation and how it works.

JeromeTash

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In trading crypto, there are people who trade crypto derivatives or futures. In this kind of trading, people either short (predict that the Bitcoin might go down, so they get profits) or Long (predict that the Bitcoin might go down, so they get profits). On top of that, they use leverage (Borrowed funds). Once they open a position with leverage with funds in his account acting as collateral, a liquidation price is set. If the market price goes against the opened position beyond that liquidation price, the exchange's Liquidation engine will close the position and take out all the collateral the trader used for borrowing.

So in the case of the recent market uptrend, there are traders who opened short positions against Bitcoin and most of them probably had their liquidation prices set at 30K,33K, 35K depending on the leverage and entry prices. When the Bitcoin price rapidly moved upwards, the positions that had no stop losses got liquidated, leading to news of massive liquidations.

BIT-BENDER

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Quote from: acroman08 on October 25, 2023, 02:09:54 PM

from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

You are correct mate, and to explain with an example let say I own a housing property worth $10 million and I see of the house for cash then I have liquidated that my housing property.

Quote

Every time when the price of BTC surges there will news articles reporting millions of dollars being liquidated.

Although OP where do you here this sort of news. Because not all the time I hear about this, I can say probably due to the surge in the price of Bitcoin people are liquidating their assets worth millions to use them to buy Bitcoin this is my thoughts about that.

acroman08

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from what I understand when someone says "Millions of dollars being liquidated" it basically means that millions of dollars worth of assets were being sold and turned into cash.

I could be wrong but that is my understanding when someone says "Millions of dollars being liquidated". I also just want to add that you can search this up if you want more info about it, pretty sure there are tons of information out there that can properly and easily explain it to you.

a298b112

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Every time when the price of BTC surges there will news articles reporting millions of dollars being liquidated. What exactly does it mean and how it works?

Topic: Can someone explain how liquidation works ? (Read 268 times)