Recently, many beginners have been getting liquidated and feeling confused, so I think it's necessary to clearly explain this mechanism.

Let's start with the most basic. Suppose Bitcoin is $50k each. You buy directly with $50k—that's a regular trade. But leverage trading is different. You only need to put up 10% of the capital, which is $5,000, and I cover the remaining $45,000—that's tenfold leverage. Of course, the borrowed money must be repaid.

At this point, if Bitcoin rises to $55k, a 10% increase, you sell and pay me back $45,000, and your $5,000 principal doubles, netting a $10k profit. Sounds great, right? But conversely, if Bitcoin drops to $45,000—just a 10% decline—under tenfold leverage, your principal is completely wiped out. Worse, you might even owe me money.

At this point, you might say, I believe the price will bounce back, so I won't sell and will hold on. But the problem is, I lent you my money—why should I gamble with you? If the price continues to fall to $44,000, I will sell your position automatically, and not only will you lose everything, but you'll also owe me $1,000. This $1,000 is a debt you must repay. This situation is called liquidation.

The only way to avoid liquidation is to add margin. For example, deposit another $5,000 into your account, so your cash plus the value of Bitcoin exceeds $45,000, and I can rest assured.

Up to this point, we're just talking about normal leverage trading. But I want to tell a darker story.

In China, there used to be many fake trading platforms. Unlike those scam sites that produce fake data, these exchanges' data were all real. But even so, they could still trick investors into losing everything.

The method is actually very simple. Suppose a tenfold leverage product, with the current price at $50k. The exchange controls all investor positions, knowing their capital, leverage ratios, and even when they are sleeping.

Late at night, the exchange teams up with market makers, ready with large funds. Most investors are asleep, unable to add margin in time. At this moment, the market maker aggressively goes long, pushing the price from $50k up to $55,000. Those with full positions and no cash—especially with tenfold leverage—are forced to liquidation while still asleep.

This doesn't require much capital because most people are sleeping. The liquidated positions automatically generate new buy orders, helping the market maker continue to push the price higher. As the price keeps rising, investors with nine or eight times leverage also start to get liquidated. The market maker thus snowballs the effect.

Suppose the price rises from $50k to $75k; all short positions with more than fivefold leverage get liquidated. If the market maker also uses tenfold leverage, closing at $75k yields a fourfold profit.

Even more impressive, after pushing the price up, the market maker can reverse and push it down. They start shorting heavily, dumping to press the price down. The rise from $50k to $75k was driven by the market maker themselves, with little follow-up buying. Dropping back to $50k isn't hard. Then, with more funds, they reverse again, smashing the price down to $25k. This time, all the traders with more than fivefold leverage on the long side get liquidated again. The market maker closes their positions with huge gains.

All these trades are real—what's needed is larger capital than retail traders, plus insider information on their specific trading data, including their entry prices, positions, leverage ratios, and inactive trading periods. With this precise targeting, the market maker can liquidate traders regardless of whether they are long or short, earning huge profits.

Of course, this story describes unregulated, unscrupulous exchanges. Legitimate markets have robust risk control mechanisms and regulation, preventing such scenarios. But understanding how liquidation works and the associated risks is essential for anyone participating in leveraged trading.