As far as cryptocurrency markets are concerned, liquidation is used to describe a scenario where an exchange forcefully closes the leveraged position of a trader due to partial or complete loss of the initial margin. This unfortunate situation arises when a trader is unable to meet the leveraged position’s margin requirements. Let’s find out more about it.
Liquidation In Leveraged Exchanges: All You Need To Know
What is liquidation in leveraged exchanges?
In leveraged exchanges and forex markets, the melting of investor’s capital is called liquidation.
The fact that cryptocurrency exchanges are developed day by day and offer different experiences to their users, affects the interest of investors in this sector even more. The stock market transactions, starting with Leveraged transactions, which are among these innovations and especially preferred by investors who have extensive knowledge in the field of trade, can provide higher profits than the spot market. However, the liquidation situation, which is also the main theme of our subject, is an important detail that investors should be aware of. You will find the answers to your questions such as what is liquidation, how to be liquid, what to do to avoid liquidation in the continuation of our article.
What is liquidation?
The word literally means “liquidation” or “sale”. When you open a leveraged trade, you will see two prices, your entry price and your liquidation price. In addition, “indicator price” is also the term you will see in this field. So what do these mean?
Entry Price: For example, by entering the “Futures” menu in Binance stock market, you placed an order for the HOT (Holo Chain) Coin at $0.009035 and received the HOT coin when the price reached the level you gave. This price is your entry price.
Indicator Price: After your entry price, the price that is displayed on the screen is the instantaneous price that appears on the screen after the price rises or falls according to the movement of the market.
Liquidation Price: Let’s say you open a $100 trade at $0.009035 and the leverage ratio is X3. The system tells you that you will lose your money after the price reaches a level. For example, if your liquidation price shows 0.006085 when you open a trade at $0.009035, you will lose all of your money when the price drops to this level.
How to be liquid?
While talking about the terms you will see in leveraged trading above, we explained the liquidation price. Losing your money when the price of the crypto money you buy drops to a certain level from the entry price is called “liquidity”. The logic of this process is as follows;
For example, you bought HOT Coins in futures and brought the leverage to X3. This means: “I opened a trade of X3 with a $100 trade. So when it increases by 3 percent, I get X3 worth of money.”
You agree that although the exchanges offer leveraged transactions to provide a different experience and gain more to their users, of course, they demand a price in return. So it’s a little unreasonable to think that it’s just about winning. On the other hand, exchanges also indicate the risk ratio to their users in leveraged transactions. In other words, the liquidity situation means that if you actually make a transaction, by signing the contract, you approve the “profit-loss is shared” clause.
What is a “long”?
One of the terms frequently used in leveraged transactions is the term “Long”, that is, “buy order”. If you think the market will go up, then you place a buy order at a low number, that is, you take a long position.
What is a “short”?
In leveraged transactions, it is possible to make money not only when the market is rising, but also when the market is falling. Perhaps it should be said that this is the most attractive aspect of leveraged transactions when acted consciously. The Short position is the opposite of the Long position. So if you think the market will go down, you place a sell order, if your predictions or the chart you draw work correctly, the market goes down and you make money as it goes down. Here, too, there is a liquidity situation. The liquidation situation here occurs when the market rises. In other words, as you go above your entry price, you lose money, and when you finally reach the liquidation price, you lose all your money.
What is stop loss?
Another term used in leveraged transactions is the term “Stop Loss”. This type of order must be used in leveraged transactions, and it must not be entered into transactions without a stop. So, what is the stop loss?
Stop Loss is called closing the position by making a loss at the rate you determined without losing all of your money, when your entry price is above a certain level (in a short position) or below a certain level (in a long position) in a transaction you open in long or short positions.
How to put stop loss?
Another option that will be offered when trading futures on crypto currency exchanges is the “profit and loss stop” option. When you come to this option, you will see three options: Stop price, price and amount. Here, by giving an up or down price according to the position (short, long) you entered in the stop price section, you say “when you reach these levels, give an order to sell the assets in my hand”.
In the price section, there are “Limit” and “market” options. If you choose the market price, your assets will be sold at the point you have determined, if you choose a limit, you will sell above or below the level you set, whichever you have chosen, when it comes to that price.
In the amount section, it is the section that allows you to gradually sell all or some of your assets when you reach the price level you have determined.
How to avoid liquidation?
1. If you are not experienced enough in chart analysis, do not enter futures,
2. Do not open futures transactions with all your assets, a certain amount of money must be in the spot wallet,
3. Do not open a long or short position in a high risk market,
4. If you think that the crypto money you have opened futures transactions will move in the direction you predicted, but you are at a loss at that moment and your money is close to the liquidation price, transfer some more USDT from your spot wallet to futures and reduce your liquidation price.
5. If you are at the beginning of the road, definitely do not open futures transactions with big money.
6. Do not trade with a leverage rate higher than the X3-5 maximum X10 level, even if it is an altcoin you trust one hundred percent.
7. If you do not have enough knowledge of technical and fundamental analysis, do not open futures,
8. Do not act on hearsay information,
9. Do not depend on the charts of those who share charts on telegram or other social media channels to open long and short positions,
10. Never enter futures or spot transactions with borrowed money.
What is USDT Coin (Tether)?
Tether (USDT) coin, not to be confused with ethereum code Ether, is a type of cryptocurrency that also supports TRC20, BEP2, BEP20, SOLANA protocols running on the ERC-20 protocol. Working on the blockchain system, USDT is different from other cryptocurrencies. As it is known, cryptocurrencies are grouped under two different subheadings: “fixed coins” and “floating coins”. USDT (Tether) is among the stablecoins. In other words, the more the dollar, the more the USDT.
Why should you get crypto USDT?
Recently, there has been serious activity in the economic market. The dominance of the dollar against other currencies continues to climb. This has affected the search for alternative options by those who want to invest. With the increasing interest in the world of cryptocurrencies, those who do not have much knowledge in this field want to evaluate it in a different way. So instead of buying physical US dollars, they prefer to buy USDT coins. So, why USDT coin?
The reliability of cryptocurrencies is a much talked about subject these days. The fact that blockchain technology is closed to cyber attacks, measures to be taken by users individually, etc. As a result, it has been discussed in many articles that cryptocurrencies are more reliable than physical currencies.
Although not investment advice, crypto USDT is much more reliable than the physical US dollar. The fact that it has an unhackable and decentralized technology such as blockchain behind it, and the fact that it cannot be interfered with by third parties in any way affects those who invest in dollars to prefer the crypto USDT area as a new area to invest in.