What are crypto liquidations?

A liquidation is when an exchange force-closes a borrowed trade that has lost too much. Here's how liquidations work and why they can make crypto prices move so fast.

A liquidation happens when an exchange automatically closes a trader's position because they borrowed money to trade and their losses have grown too large. It's not a choice: the exchange does it to make sure the loan gets repaid.

How it works

Crypto exchanges let traders use "leverage", which means controlling a bigger position than the money they put in. With 10x leverage, US$1,000 controls a US$10,000 position. That magnifies gains, but it also magnifies losses: a 10% move against you wipes out the whole US$1,000.

Before that happens, the exchange steps in and closes the position. That's the liquidation.

Why liquidations move prices

Closing a bet that prices would rise (a "long") means selling. Closing a bet that prices would fall (a "short") means buying. When many positions get liquidated at once:

• A fall triggers forced selling of longs, which pushes prices lower, which triggers more liquidations. This is sometimes called a "long squeeze" or cascade.
• A rise triggers forced buying of shorts, which pushes prices higher. This is a "short squeeze".

That chain reaction is why crypto sometimes moves 5% in minutes.

What the numbers tell you

You'll often see headlines like "US$400 million liquidated in 24 hours". Two things are worth checking:

• Which side got hit? Mostly longs means a sharp drop; mostly shorts means a sharp rise.
• Is it unusual? Liquidations happen every day. It's the spikes that matter.

How SteelWater uses it

Our daily read reports overnight liquidations and which side took the hit, and our Ultimate plan sends real-time alerts when liquidations spike. More on the two sides in longs and shorts explained.

General market information for education only, not financial advice. Crypto-assets are highly volatile; never risk money you can’t afford to lose.