The Truth About Liquidations: Why Virtual Currencies Can Leave People Bankrupt with Every Rise and Fall

Talking about virtual currency liquidation, many beginners confuse the concept. Common news headlines are “Bitcoin surges, 100,000 people liquidated” or “Bitcoin crashes, another 200,000 people liquidated.” This seems contradictory—liquidation isn’t just losing money, right? Why would Bitcoin’s rise also cause liquidation?

In fact, the essence of virtual currency liquidation is not complicated, but the trading logic involved can easily lead people into pitfalls. Today, let’s clarify this issue thoroughly.

Liquidation is a sudden collapse

Simply put, virtual currency liquidation means your margin is fully frozen by the exchange and your positions are forcibly closed. The specific process is as follows:

You borrow money from the exchange to trade Bitcoin. Once the market moves against you and your losses reach your account’s margin limit, the system automatically closes all your positions to repay the debt. At this moment, your principal disappears—this is liquidation.

Virtual currency liquidation differs from traditional losses—losses can be recovered gradually, but liquidation is an instant wipeout.

Leverage trading: amplifying dreams and nightmares

The fundamental reason for virtual currency liquidation is leverage trading.

Many traders are dissatisfied with investing only with their own money and instead borrow from exchanges to amplify gains. For example: you have only 1,000 yuan but want to operate a 10,000 yuan Bitcoin position.

If Bitcoin rises by 10%, you earn 1,000 yuan—a doubled return. Sounds tempting, right?

But conversely, if Bitcoin drops by 10%, you lose 1,000 yuan—your entire principal vanishes, plus you still owe the exchange borrowed funds. This is the most common trigger for virtual currency liquidation.

Leverage is like a double-edged sword. 10x leverage means that even a 10% move in Bitcoin can wipe out your principal. With such market volatility, triggering liquidation becomes routine for high-leverage traders.

Why does Bitcoin’s rise sometimes cause liquidation?

This is the most confusing phenomenon. The key lies in: you predicted the wrong direction.

In leverage trading, you can buy long(or short).

Suppose Xiao San predicts Bitcoin will fall, so he uses 10x leverage to “short”—borrowing money to sell Bitcoin, waiting for it to drop so he can buy back for profit. But suddenly, Bitcoin surges, and Xiao San’s judgment is completely reversed. Although the market is rising, Xiao San’s short position is losing money, and virtual currency liquidation occurs.

In other words, virtual currency liquidation isn’t caused by Bitcoin rising or falling, but by your prediction being wrong.

Why does a crash trigger a wave of liquidations?

When Bitcoin crashes, large-scale liquidation phenomena are especially obvious. Here’s a chain reaction:

First wave of liquidation comes from those who bought long positions—if the price drops too much, their long positions are directly wiped out.

Second wave stems from leverage amplification—traders who would be liquidated with only a 5% decline are now being forced to close positions simultaneously. This triggers a cascade effect: massive sell-offs cause further price drops, which in turn trigger more liquidations, forming a “chain reaction.”

This explains why news often reports scenes like “200,000 people liquidated”—it’s not coincidence but an inevitable outcome dictated by market structure.

Why do “liquidation waves” frequently appear in news?

In the virtual currency market, leveraged traders account for a much higher proportion than spot traders. To achieve quick profits, they often choose high leverage and heavy positions.

When market sentiment is overly bullish or bearish, many traders bet on the same direction simultaneously. Once the market moves against them (often only 3-5%), these high-leverage positions are forcibly liquidated in an instant. The exchange systems process thousands of forced liquidations at once, leading to headlines like “X ten-thousand people liquidated.”

In reality, this reflects extreme imbalance of market sentiment, not just simple Bitcoin price movements.

How to go from spectator to survivor in virtual currency liquidation?

Now that you understand the logic of liquidation, avoiding it is not difficult:

Step 1: Stay away from high leverage

The most common liquidators use leverage above 5x. If you’re a beginner, the safest approach is to avoid leverage altogether and only trade spot. Leverage is a tool to amplify gains but also the main culprit of virtual currency liquidation.

Step 2: Set stop-loss points

Decide your loss limit before placing an order, and set stop-loss orders to automatically close your position. This prevents losses from expanding infinitely and is a key defense against virtual currency liquidation.

Step 3: Control your position size and keep enough principal

Don’t put all your funds into one trade. Even if your judgment is correct, keep 30-50% of your capital to handle sudden market fluctuations. Diversifying positions can significantly reduce the risk of liquidation.

Step 4: Avoid trading during extreme market volatility

During intense market swings, emotions often override rationality. Beginners are most likely to heavily follow the trend at this time, ultimately becoming part of the liquidation crowd.

In a nutshell

The root cause of virtual currency liquidation is: leverage trading + wrong prediction of market direction + amplified market volatility.

Bitcoin itself just goes up or down, but high leverage turns these fluctuations into disasters. When prices rise, short sellers get liquidated; when prices fall, long buyers get liquidated. In either case, losses are magnified 10x, 100x by leverage.

While the virtual currency market offers many opportunities, risks are very real. Especially for beginners, controlling risk is always more important than chasing profits. The best way to avoid virtual currency liquidation is to trade rationally, operate lightly, and prevent leverage from becoming your noose.