Recently, I saw someone ask what liquidation of a contract means, so I might as well organize my understanding of leveraged trading.

Let's start with the most straightforward example. Suppose Bitcoin is $50,000 each, and you have $5,000. Regular trading means saving up money and waiting until you have enough to buy. But leveraged trading is different—you can only put in $5,000, and the remaining $45,000 is borrowed from the exchange. This is tenfold leverage.

Sounds good, right? If Bitcoin rises to $55,000, you sell and pay back the loan, doubling your $5,000 principal to $10,000 profit. But this is the most dangerous part of leveraged trading—losses are also magnified ten times.

If Bitcoin drops to $45,000, it looks like only a 10% decline. But your $5,000 principal, under tenfold leverage, is wiped out completely. Even worse, if it drops to $44,000, not only do you lose your entire capital, but you also owe the exchange $1,000. This is liquidation. The exchange will forcibly close your position, turning your losses into debt.

The only way to avoid liquidation is to add more funds. Deposit another $5,000 into your account so your position can be sustained. But here’s the problem—what if it’s midnight and most people are asleep?

This leads to a dark story. There used to be a bunch of unregulated fake exchanges in China. Their data was real, but they still managed to wipe out retail investors’ funds. The method is simple.

For example, a tenfold leveraged product, with the price at $50,000. The exchange controls all investor positions, funds, and leverage ratios. The market maker, working with the exchange during the dead of night, secretly invests heavily to go long. They push the price up to $55,000.

At this point, the full-long investors are still sleeping and can’t react in time to add funds. Their positions are instantly liquidated and forcibly closed. The forced liquidation automatically creates buy orders, helping the market maker push the price even higher.

This way, the price keeps rising, and all short positions with more than fivefold leverage are liquidated. The market maker uses minimal capital to snowball the price from $50,000 to $75,000. Whose pocket does the liquidated money go into? The market maker’s. They entered with tenfold leverage, and a 50% increase earns them four times their capital.

Even more impressive, after shorting, the market maker can switch to long positions. Now they do massive shorting, smashing the price from $75,000 back down to $50,000. Retail traders following the trend, with leverage over five times, all get liquidated again. The market maker buys to close their positions and earns another round.

All these trades are real, with no fake data. As long as they control retail traders’ trading data, position prices, and leverage ratios, and know when retail traders are least active, they can precisely target and manipulate. Whether retail traders go long or short, they all get liquidated. The market maker profits handsomely.

This story isn’t about Bitcoin specifically; it’s about those unregulated, shady exchanges. After all, legitimate markets wouldn’t do such things.

But honestly, the key to understanding liquidation is realizing that leverage is a double-edged sword. It amplifies gains, but also amplifies risks. Your principal can hold out waiting for a recovery, but the exchange’s money can’t. Once the liquidation threshold is triggered, the system will automatically close your position. This isn’t some conspiracy; it’s just the rules of leveraged trading. Understanding this, participating in futures trading won’t let you get beaten by the market.