Actually, many people don’t fully understand what liquidation means in leveraged trading. Today, I’ll explain it to everyone in the most direct and straightforward way.

Let’s start with the most basic part. If Bitcoin is $50,000 each and you take $50,000 to buy one directly, that’s regular spot trading—nothing to talk about. But leveraged trading is different. With the same $50,000, you only need to put up $5,000, and I’ll cover the remaining $45,000 for you—this is ten-times leverage. Of course, the $45,000 I cover isn’t free; it’s money I’m borrowing for you, and you have to pay it back later.

Now, if Bitcoin rises to $55,000 and you sell to repay my $45,000, you keep a net profit of $10,000. It’s like your $5,000 principal doubles instantly. Sounds great, right? But the opposite is disastrous.

If Bitcoin falls to $45,000—only a 10% drop—under ten-times leverage, your $5,000 principal is completely gone. At this point, you might think, “I’ll just hold on and wait for the price to go back up.” But I won’t agree. My money can’t be gambled along with you—why should it? So I have the right to sell your coins immediately, take my $45,000 back. Even worse: if the price drops again to $44,000, after I sell, you won’t just lose everything—you’ll also owe me $1,000. That $1,000 becomes your debt, and this process is called liquidation.

What liquidation means is that your account’s losses can no longer cover the borrowed funds. The exchange will forcibly close (liquidate) your position. You not only lose your principal—you may also end up owing money. To avoid liquidation, the only way is to add margin—top up your account with another $5,000—so that your funds plus the value of your coins once again exceed $45,000. Then I can rest easy.

After covering the basic concept, let me tell you a story. In China, there used to be a large number of fake trading platforms. What’s interesting about these platforms is that their data is all real, yet they can still deceive investors completely.

The method is simple. For example, take a product with ten-times leverage. Assume the price is $50,000 per unit. The exchange has all the investors’ position data. It knows who is going long, who is going short, how much cash is left in each account, and how many times of leverage each person is using. To the operator, this information is like a cheat code.

In the middle of the night, when it’s dark and windy, most investors are asleep. At that moment, the operator teams up with the exchange and goes all in—aggressively going long—pushing the price up to $55,000. Those short investors who are fully loaded and have no cash, under ten-times leverage, immediately cross the liquidation line. But they’re still asleep, so they can’t add margin in time. As a result, their positions get forcibly liquidated. This is liquidation.

What’s the most ruthless part? The liquidation of short positions automatically creates buy orders, which is essentially helping the operator keep pushing the price higher. As the price continues to rise, investors using nine-times, eight-times leverage also start getting liquidated. The operator only needs a relatively small amount of money to start the snowball effect, wiping out every short from ten-times leverage down to five-times leverage along the way.

Suppose the price moves from $50,000 to $75,000. Then all the shorts with leverage higher than five-times get liquidated. Where does the money they lose go? Into the operator’s pocket. The operator is also using ten-times leverage—going from $50,000 to $75,000, their pure profit is 4 times.

But the operator’s actions aren’t finished. After crushing the shorts, they immediately reverse the trade and go aggressively short, smashing the price back down from $75,000 to $50,000. At this point, there won’t be many follow-the-crowd orders, because everyone knows this move was made by the operator. Then the operator uses even more capital to smash the price from $50,000 down to $25,000. Those who went long at $50,000 with leverage higher than five-times are liquidated again. Finally, the operator buys to close positions, and it ends perfectly.

In plain terms: all the trades are real, but the operator has two advantages. First, they have a large amount of capital. Second, they have access to retail traders’ trading data—they know at what price you opened your position, how much leverage you used, how much cash you have in your account, and which time periods you’re inactive. With this information, they can precisely target and trigger liquidations. Whether retail traders go long or short, they all get liquidated, and the operator profits handsomely.

Of course, the story above isn’t about Bitcoin. Bitcoin is so legitimate—so how could there be an operator behind it? How could a situation happen where 20% of people control 80% of the chips? And with Bitcoin’s security being so high, how could anyone trick money using trading data? So for Bitcoin, liquidation is just normal market behavior—there’s definitely no dark scheme.

In short, understanding what liquidation means and being clear about the risks of leverage is crucial for survival in the crypto space. If you want to go deeper into this area, there are some discussion resources on my homepage—we can talk and exchange ideas with each other. If there’s an opportunity, I’ll also share some thoughts on contract trading and spot trading. But I have to say this clearly: don’t come right away and ask me whether you can buy a certain coin, or how you can make money—those are things I really can’t predict. I hope our exchange can always stay as pure as it was at the beginning.