Recently, I’ve seen many beginners asking what a liquidation (爆倉) in virtual currency trading means, so I thought I’d explain this clearly.

Let’s start with the most straightforward example. Suppose Bitcoin is now $50,000 each, and you have $5,000. The normal way to buy is that you don’t have enough funds, so you can’t buy. But with leverage, it’s different. I borrow you $45,000, and you put in $5,000, totaling $50,000 to buy one Bitcoin—that’s a tenfold leverage trade.

Sounds good, right? If Bitcoin rises to $55,000, you sell and pay me back $45,000, leaving you with a net profit of $10,000, which doubles your $5,000 principal. But here’s the problem: the cryptocurrency market is very volatile. What if Bitcoin drops to $45,000? Your coins are still worth $45,000, just enough to pay off my loan, and your $5,000 is gone. At this point, if you still want to hold on, waiting for a rebound, I won’t be with you. My money can’t be risked along with yours, so I have the right to sell your coins directly and recover my $45,000.

Even worse, if I sell slowly and the price drops to $44,000, not only do you lose your entire investment, but you also owe me $1,000. That $1,000 is debt—you have to pay it back. This is what’s called liquidation (爆倉), the most terrifying thing in virtual currency trading.

The only way to avoid liquidation is to add more margin. Deposit another $5,000 into your account, so the total cash plus the value of your coins exceeds $45,000 again, and I can relax.

After explaining the basic concept, I need to talk about something darker. In China, there have been many fake trading platforms. Unlike scams that just fake data or websites that cheat investors outright, these exchanges’ data are all real, but they still manage to bankrupt investors completely.

The method is actually very simple. Suppose there’s a tenfold leverage product on the exchange, with the current price at $50,000 per unit. Many traders hold long and short positions at this price. The exchange knows exactly who holds what, their funds, and their actual leverage ratios.

Then, on a dark, windy night, the exchange collaborates with several market manipulators, ready with large amounts of capital, to sweep away all retail traders in one go. Why choose midnight? Because most people are asleep, and it’s impossible to detect abnormalities or add margin in time.

The manipulators start aggressively buying, pushing the price up to $55,000. Short traders who are fully leveraged and have no cash left are immediately on the brink of liquidation. They’re still sleeping and can’t add margin, so automatic liquidation (liquidation orders) kicks in. Most people are asleep, so they can’t react in time.

The liquidated shorts automatically generate buy orders, which help the manipulators push the price even higher. As the price rises, traders with nine or eight times leverage also start to get liquidated. The manipulators only need a small amount of capital to snowball and wipe out layer after layer of short positions.

Suppose the price moves from $50,000 to $75,000; all shorts with more than five times leverage are liquidated. Where does that money go? If the manipulators also use tenfold leverage, buying at $50, selling at $75, they can make a fourfold profit.

Even more impressive, after pushing down the shorts, the manipulators can reverse and start shorting again. They aggressively sell to crash the price. Since the price from $50,000 to $75,000 was pushed up by the manipulators themselves, there aren’t many follow-up traders. Dropping from $75,000 back to $50,000 is not difficult. By increasing their capital and doing the same operation in reverse, crashing from $50,000 to $25,000, they can cause all traders with more than five times leverage to be liquidated again. The manipul