I want to talk to everyone about leverage trading recently, because many beginners still have some confusion about this concept. I’ve seen quite a few people suffer losses because they don’t understand its risk mechanism.

First, let’s discuss the most basic logic. Suppose Bitcoin is now $50k each, and you have $5,000 and want to participate in this market. Regular trading is simply buying directly, but leverage trading is different. You only need to put up $5,000 as margin, and I lend you $45,000, so you can buy a whole Bitcoin. This is called tenfold leverage. Of course, the money I lend isn’t free; you’ll have to pay me back later.

This sounds quite profitable, right? Indeed, if Bitcoin rises to $55k, you make a 10% profit. Sell it, pay back the $45,000 I lent you, and your original $5,000 capital doubles to $10,000. But what if it drops? If it falls to $45,000, your situation becomes very awkward. Your Bitcoin is now only worth $45,000, which is just enough to pay back my loan. Your $5,000? Gone.

At this point, you might think, I’ll just hold on and believe it will bounce back. But I can’t gamble with you like that because that’s my money. So I have the right to sell your coins directly and recover my $45,000. If the price drops a little more and reaches $44,000, you not only lose your principal but also owe me $1,000. This $1,000 becomes your debt, and that’s what’s called a liquidation.

Want to avoid liquidation? The only way is to add more margin. For example, you deposit another $5,000 into your account, so your total funds plus the Bitcoin’s value exceed $45,000. Then I can rest assured and won’t forcibly liquidate your position.

But here I want to tell a darker story. There have been many fake exchanges domestically, not the kind that directly fake K-line charts, but where all data is real yet still manages to trap investors completely.

The method is actually very simple. Suppose a tenfold leverage trading product, with the current price at $50k. The exchange controls all investor position information, knowing who is long or short, each account’s funds, and actual leverage ratio. All of this is insider information.

On a dark, windless night, the exchange teams up with several big whales, prepared with sufficient funds, and begins to harvest. Why choose night? Because most retail investors are asleep. How can you detect price movements in time to add margin if you’re sleeping?

The whales start wildly going long, pushing the price from $50k up to $55,000. At this point, those with full positions and no cash—shorts with tenfold leverage—are immediately liquidated. They have no idea what’s happening because they’re still sleeping. Their positions are automatically liquidated, and the money flows into the whales’ pockets.

This process doesn’t require much capital because the market liquidity is limited, and most people are asleep. As the price continues to rise, investors with ninefold, eightfold leverage also start to get liquidated. Their forced liquidation orders help the whales push the price even higher, creating a snowball effect.

Suppose the price is eventually pushed to $75k, then all short investors with more than fivefold leverage are wiped out. All their liquidation funds flow to the whales. The whales themselves are also tenfold leverage; going in at $50k and coming out at $75k yields a profit of four times.

Even more ruthless, the whales can reverse their operations after shorting. They start aggressively shorting, crashing the price from $75k back to $50k. Since this rise was mainly manipulated by the whales, with little follow-up buying, it’s not hard to push down. Then they increase their capital again and reverse the operation, smashing the price from $50,000 down to $25k. At this point, all the investors who went long with more than fivefold leverage are liquidated again.

All these trades are real, with no fakery. But the whales have vastly larger funds than retail traders, controlling each individual’s trading data and positions, knowing exactly where their risk lines are, and when they are most vulnerable. Retail traders, whether long or short, cannot escape liquidation; the whales profit immensely.

Of course, I’m not talking about Bitcoin here. Bitcoin is so legitimate—how could there be whales? How could 20% of people control 80% of the chips? And Bitcoin is so secure—how could malicious exchanges manipulate trading data to cheat traders? Surely, such things don’t happen. Liquidation is just normal market fluctuation, with no dark secrets.

In short, understanding the mechanism of leverage trading is very important, especially to grasp the logic behind liquidation. This is not just theoretical knowledge but a necessary lesson to protect yourself.