Liquidation

A liquidation happens when a position funded with borrowed money is closed automatically because the collateral no longer covers the loan. It shows up in two places: leveraged trading, such as perpetual futures or margin accounts, and borrowing on lending protocols, where you lock one token to borrow another. In both cases the system does not wait for you to react.

Every leveraged position has a liquidation price or a health threshold. On a perpetual futures venue, a 10x long is wiped out after a drop of roughly 10 percent, and a little sooner once fees and maintenance margin are counted. On a lending protocol, you must keep collateral above a required ratio. If it falls below that, anyone can repay part of your debt and take your collateral at a discount, and that discount, the liquidation penalty, comes out of your pocket.

Liquidations matter even to people who never use leverage, because they can feed on themselves. When price drops, forced sells push it lower, which triggers more liquidations and produces the sharp cascading candles traders call a flush or a long squeeze. Thin small-cap tokens are especially exposed, since a modest forced sale moves the price a lot. A token with heavy leverage stacked on it can wick down hard and snap back, taking out stops and nervous holders along the way.

If you use leverage, look at the liquidation price rather than just the entry price, and check whether your margin is isolated or cross. Cross margin can pull your entire balance into one losing trade. On lending protocols, check the collateral factor, the liquidation penalty, and which oracle prices your collateral, because volatile, low-liquidity collateral is a common trap. Leave a wide buffer, since price can gap through your level and the fill can be worse than the number on your screen.

Plain spot holders are not liquidated. If you buy a token with your own money and never borrow against it, a crash hurts but cannot force you out of the position.