Recently, I’ve been thinking about a question: many people, after entering the crypto space, hear the word "liquidation" the most, but not many truly understand what liquidation really means. Let me explain the logic behind it.

First, let’s start with the basics. Bitcoin costs $50k each. If you buy one with $50k in cash, that’s a normal transaction. But leverage trading works differently. You only need to put up 10%, which is $5,000, and I will cover the remaining $45,000 for you. That’s ten times leverage. Of course, the money I provide isn’t free; it’s a loan that you need to repay later.

The benefit of this is obvious. If Bitcoin rises to $55k, that’s only a 10% increase, but your $5,000 principal doubles directly. Sounds great, right? But what if it falls? If it drops to $45,000, that’s a 10% decline, but with ten times leverage, your money is wiped out. At this point, you want to hold on and wait for a rebound, but the borrowed money can’t wait. Why should I stay and gamble with you? What if it doesn’t go back up—what do you have to pay me back? So I have the right to sell the coins directly and take my $45,000. If I sell slowly and the price drops to $44,000, not only are you wiped out, but you also owe me $1,000. This is called liquidation.

The only way to avoid liquidation is to add margin. You deposit another $5,000 into your account, so the total account value exceeds $45,000 again, and I can relax.

Now, let me tell a story. There used to be many fake domestic trading platforms. Interestingly, the data on these platforms was all real, but they still managed to wipe investors out completely. How did they do it?

For example, there’s a product with ten times leverage, priced at $50k per unit. Many traders hold long and short positions. The exchange knows each person’s position, how much cash they have, and their leverage ratio—that’s the key.

On a dark and windy night, the exchange teams up with a few powerful market makers, ready with large amounts of capital. Why midnight? Because most people are asleep, and they can’t react quickly to add margin.

The market makers start aggressively going long, pushing the price from $50k to $55,000. At this point, short investors who are fully leveraged and have no cash are forced to be liquidated. They’re still sleeping and can’t add margin in time, so their positions are forcibly closed. This doesn’t require much money, since most people are asleep, and the amount needed is small. The liquidated positions automatically generate new buy orders, effectively helping the market makers push the price higher.

As the price continues to rise, investors with 8x or 9x leverage also start to get liquidated. The market makers sweep upward, eventually liquidating all short positions with more than 5x leverage. Suppose the price moves from $50k to $75k; the money lost by liquidated traders all goes into the market maker’s pocket. The market maker, using 10x leverage themselves, can earn four times the profit from a move from $50k to $75k.

Even more ruthless, after shorting, the market maker can also go long. They aggressively short to push the price down. The entire rise from $50k to $75k was manipulated by the market maker, with little participation from follow-on traders. The market maker then dumps from $75k back to $50k, which is not difficult. By increasing their capital, they can reverse the operation, smashing the price down to $25k. The traders with more than 5x leverage who went long are all liquidated again. The market maker buys back at the lower price, earning another round of profit.

All these trades are real; the only difference is that the market maker has larger capital and access to the retail traders’ position data, knowing where they entered, their leverage, and when trading is less active. With this insider information, they can precisely target and manipulate the market. Retail traders, whether long or short, get liquidated, while the market maker profits immensely.

Of course, this story describes unregulated, unscrupulous black-market exchanges. Bitcoin is so legitimate—how could there be market makers? How could 20% of people control 80% of the chips? And Bitcoin is so secure—how could someone manipulate money through trading data? So you see, liquidation is definitely a normal market phenomenon; there’s certainly no conspiracy behind it.