What is BTC liquidation or what is cryptocurrency liquidation?

In the field of cryptocurrency, "liquidation" refers to the phenomenon where a trader holding a leveraged position loses their investment due to significant price fluctuations. Leveraged trading involves using borrowed funds to engage in trading, which increases potential profits but also amplifies the risk of potential losses.

When traders use borrowed funds to purchase cryptocurrencies in leveraged trading, they are required to provide a certain amount of assets as collateral on the exchange. This collateral is typically represented as a ratio, such as 3x leverage, which means the trader only needs to provide one-third of the total trade value as collateral.

If the price of the cryptocurrency declines and reaches a predetermined liquidation price set by the exchange, the exchange will automatically force liquidate the trader's position to prevent default on the debt. This process is known as "liquidation." During a liquidation, the trader's collateral is sold to offset the debt they are unable to repay.

Liquidation is a common risk in the cryptocurrency market, especially during periods of high price volatility. Therefore, traders need to exercise caution when engaging in leveraged trading and understand their risk tolerance to avoid potential losses.