Liquidation Crypto: What It Is, Why It Happens, and How to Avoid It

When you trade crypto with liquidation crypto, the automatic forced closing of a leveraged position when losses hit a critical point. Also known as margin call liquidation, it’s what happens when your trade goes so wrong the platform shuts it down to stop you from owing more than you have. This isn’t some rare edge case—it’s a daily reality for traders using leverage, especially on platforms that offer 50x, 100x, or even 125x exposure. Most beginners think leverage is a shortcut to big gains. They don’t realize it’s also a shortcut to losing everything—fast.

Crypto leverage, borrowing funds to increase your trading position size is the main driver behind liquidation. If you put up $1,000 and borrow $9,000 to trade $10,000 worth of Bitcoin, a 10% drop wipes out your entire stake. That’s not a market move—it’s a margin call. And if the price keeps falling, the exchange steps in and sells your position to cover the loan. That’s liquidation risk, the chance your leveraged position will be forcibly closed due to insufficient collateral. It’s not a bug. It’s a feature built into every leveraged trading system.

What makes this worse is how DeFi platforms handle collateral. Unlike centralized exchanges that might give you a warning, DeFi protocols like Aave or Compound don’t care if you’re having a bad day. They follow code. If your LTV ratio, the percentage of your loan value compared to your collateral value goes above the set limit—say 80%—your position gets liquidated instantly. No email. No notice. Just gone. And the liquidator? They’re a bot that makes a profit by buying your assets at a discount. You lose. They win. It’s that simple.

People think they can time the market. They think they’ll bail out before it gets bad. But markets don’t wait. A sudden news spike, a whale dumping, or a flash crash can trigger liquidation in seconds. The traders who survive? They don’t gamble. They use lower leverage. They keep their LTV under 50%. They use stablecoins as collateral because they’re less volatile. They monitor their positions like a hawk. And they never, ever risk more than they can afford to lose.

Below, you’ll find real-world breakdowns of how liquidation hits traders, why some DeFi loans fail while others survive, and how to spot the warning signs before it’s too late. No fluff. No theory. Just what actually happens when your position gets wiped out—and how to make sure it doesn’t happen to you.