What Is Liquidation?
Liquidation refers to converting an asset or cryptocurrency for fiat or its equivalents, such as Tether (USDT) and other stablecoins, which can be voluntary or forced.
Forced liquidation involves automatic conversion when a trade meets set conditions.
In the cryptocurrency industry, force liquidation occurs with margin trading where a trader’s position automatically closes when they fail to maintain the needs of a leveraged position.
Note that margin trading involves leverage, which is the multiple of the funds that a trader borrows in order to boost their position.
Higher leverage means a lower price range for liquidation.
Understanding Liquidation Price Calculation
In some cases, forced liquidation happens before a trader’s share is reduced and charges a fee.
However, margin trading platforms such as Binance enable users to calculate the liquidation price before entering a leverage position.
Mostly, the liquidation price considers the position size, leveraged amount, and account balance.
Apart from margin trades, liquidation also happens in the futures market.
Voluntary liquidation, on the other hand, refers simply to a trader deciding to cash out their crypto-asset for their own reasons.