Many people ask me what liquidation really means. Today, I’ll explain it to everyone in the simplest way.

Let’s start with the most basic trading. Bitcoin at $50,000 each—you buy one for $50,000—that’s regular trading, straightforward. But exchanges also offer another way, called leverage trading. You buy one Bitcoin, but you only need to put up 10%, which is $5,000, and the remaining 90% is borrowed from the exchange. That’s 10x leverage.

Of course, this money isn’t free—you have to pay it back. If Bitcoin rises to $55,000, a 10% increase, and you sell, you get back $45,000, leaving $10,000 profit. Your $5,000 principal doubles. Sounds pretty awesome, right?

But on the flip side, if Bitcoin drops to $45,000, a 10% decrease, with 10x leverage, your $5,000 is essentially wiped out. You might think the price will bounce back and want to hold on, but the exchange won’t gamble with you. The $45,000 is borrowed money—why wait with you? So the exchange has the right to sell your coins directly and take their money back. If they sell slowly and the price drops to $44,000, not only do you lose your entire investment, but you also owe $1,000. That $1,000 is debt—you must pay it back. That’s what liquidation means.

To avoid liquidation, there’s only one way: add more funds. Deposit another $5,000 into your account, so your total cash plus Bitcoin’s value exceeds $45,000 again, and the exchange feels safe.

Here’s a real story. There used to be a bunch of fake exchanges in China. Unlike sites that just fake data, these exchanges had real data, but they still managed to trick investors into losing everything.

The method is simple. Suppose there’s a 10x leverage product, and the current price is $50,000 per unit. At this time, many traders hold both long and short positions. The exchange knows all investors’ positions, how much cash they have, and their leverage ratios.

On a dark, windy night, the exchange teams up with some powerful market makers, ready with large funds, and begins to manipulate the market. Why at night? Because most retail traders are asleep and can’t quickly notice the danger or add funds to cover their positions.

Late at night, the market makers aggressively buy, pushing the price from $50,000 to $55,000. At this point, those with full positions and no cash left in their accounts, especially with 10x leverage, are forced to liquidation. But they’re sleeping and can’t add funds in time, so their positions are forcibly closed by the system. This operation doesn’t require much money because most traders are asleep—only a small amount of capital is needed to push the price higher.

The forced liquidation orders automatically turn into buy orders, helping the market makers continue to push the price up. As the price keeps rising, traders with some funds and leverage of 8x or 9x also start to get liquidated. The market makers roll the snowball, using very little capital to wipe out various leveraged short positions.

If the price rises from $50,000 to $75,000, all shorts with more than 5x leverage get liquidated. Where does that liquidation money go? The market makers, also using 10x leverage, close their position at $75,000, earning a fourfold profit.

Even more ruthless, after shorting, the market makers can turn around and go long. They aggressively short to push the price down. Since the rise from $50,000 to $75,000 was mainly driven by the market makers themselves, there aren’t many retail traders following along. The market makers then push the price back down from $75,000 to $50,000 with ease. They can then increase their funds and reverse the operation, smashing the price down to $25,000. At this point, all longs with more than 5x leverage at $50,000 are liquidated again. The market makers buy in to close their positions.

All these trades are real transactions, but they require much larger funds than retail traders, plus they have access to data on retail traders’ positions, entry prices, leverage ratios, and inactive periods. This allows them to precisely target and manipulate the market. Whether retail traders go long or short, they get liquidated, while the market makers profit immensely.

This story describes unregulated, unscrupulous exchanges. Of course, Bitcoin is so legitimate—how could market makers control the chips? Bitcoin is so secure—how could exchanges cheat with data? So, liquidation is definitely a normal market phenomenon, with no dark secrets.

In short, understanding what liquidation means is very important. If you want to establish yourself in the crypto space, you need to understand these risks. You can check my homepage; I’ll share some ideas on futures and spot trading. But don’t just ask me how to make money on a certain coin—I really can’t tell you. I hope our communication can always stay true to its original purpose.