Many newcomers enter the crypto market, and the first thing they need to understand is what “liquidation” means. I’ve seen too many people lose all their principal just because they didn’t understand this concept.

Let’s start with the most basic idea. You have 5,000 dollars in hand and want to buy Bitcoin. Regular trading is simple—you just buy directly, paying one cent for one cent’s worth. But leverage trading is different. The exchange tells you that you only need to put up 10%, and the remaining 90% it lends to you. That means with 5,000 dollars, you can control 50,000 dollars worth of Bitcoin. This is ten times leverage.

It sounds great, doesn’t it? If Bitcoin rises to 55,000, you can double your money right away. But the problem is: the 45,000 dollars the exchange lends you isn’t free—you have to repay it. And that money isn’t yours; the exchange owns it and can dispose of it at any time.

Now suppose Bitcoin drops to 45,000. It looks like it only fell by 10%, so it doesn’t seem like a big deal. But with ten times leverage, your 5,000 dollars in principal is already completely wiped out. Even worse, if the price keeps falling to 44,000, you don’t just end up losing everything—you also owe the exchange 1,000 dollars. This debt must be repaid. This is liquidation.

The essence of liquidation is that your margin gets exhausted. The exchange will forcibly close (liquidate) your position and deduct the loss from your account. Sometimes you don’t even realize it—you go to sleep, and when you wake up in the morning, you find out you’ve already been liquidated.

I remember an interesting phenomenon. In China, there used to be a whole bunch of fake trading platforms. They weren’t like those scam websites that fabricate data outright—these exchanges’ data were all real, yet they could still骗 investors into losing everything. The method was actually quite simple.

The exchange has all investors’ position information, fund amounts, and leverage ratios. It even knows when you’re active and when you’re asleep. As long as they pick a time in the middle of the night and a few strong market makers are ready with large amounts of capital, they can start targeting. They go on a frenzy of long buying, pushing the price from 50,000 up to 55,000. At that point, the short traders who are fully loaded with positions and have no cash left cross the line. But they’re still asleep and can’t react in time to add margin, so they get automatically liquidated.

This whole process doesn’t require much money because most people are asleep and liquidity is poor, so only a small amount of capital is needed to push the price up. Also, the automatic sell orders created by liquidations help the market makers keep pushing the price higher. The price climbs to 75,000, and all short sellers using more than five times leverage get liquidated. Assuming the market makers are also using ten times leverage, they can close their positions from 50,000 to 75,000 and earn a profit of 4x.

Even more impressive: after finishing with the shorts, the market makers can turn around and go long. They dump aggressively, crashing the price back down to 25,000. At this point, the traders who went long at 50,000 with more than five times leverage get liquidated again. The market makers buy to close at the lower price, earning profits once more.

All trading data is real, and the retail traders’ liquidations are real. But the key is that the market makers have an information advantage and a capital advantage—they know retail traders’ specific positions and leverage ratios, and they know when it’s easiest to strike. No matter whether retail traders go long or short, they can’t escape being targeted.

Of course, what I described above is something only unregulated, unscrupulous exchanges would do. Legitimate exchanges definitely wouldn’t operate like this. But this story can help you understand that liquidation isn’t only the result of market fluctuations—sometimes there’s someone manipulating things behind the scenes.

So my advice is: if you still haven’t fully figured out how liquidation works, don’t rush into leverage trading. Start with spot trading, understand the market’s “temperament,” and then slowly progress. Leverage trading is like dancing on a tightrope—one mistake, and you fall into an abyss.