What is Forced Liquidation?
Let's find out Forced Liquidation meaning, definition in crypto, what is Forced Liquidation, and all other detailed facts.
Liquidation refers to the conversion of assets into cash or cash equivalents. The compulsory conversion of assets into cash is known as forced liquidation. It's a system for generating market orders to exit leveraged positions. The difference between liquidation and forced liquidation is that the latter occurs automatically when certain requirements are met (or not).
In the crypto world, when an investor doesn’t fulfill the margin requirements for a leveraged position, forced liquidation occurs. Liquidation applies to both – futures and margin trading.
Keep in mind that liquidation price is something you should pay attention to when trading with leverage. If your leverage is high, the liquidation price is very close to your entry.
To illustrate, imagine that you begin with a $100 deposit. Let’s say you take a 15x leveraged long position in the BTC/ETH market. This means that your position is worth $1500 out of which $100 is yours and the remaining is borrowed.
Now imagine that BTC drops by 10%. What happens? Your position is now worth $1350. That's a bummer, right?
However, imagine that your position continues to lose money. This means that the borrowed funds will definitely be affected but the lender surely doesn't want to lose money on your account. Because of this, your position will most likely be liquidated to safeguard the capital of the lender. Thus, you'll lose your $100 investment.
Keep in mind that a liquidation fee is usually added to forced liquidation. It differs between platforms platform. However, it encourages traders to close their positions before they get closed automatically. Though a lot of trading platforms allow users to evaluate the liquidation price of a position before it is entered.
Additionally, note that liquidation might also be utilized when talking about bankruptcy. When a person or a company has to convert its assets into cash, it's referred to as liquidation. In this case, cash is perceived as a "liquid" form of an asset.
The Forex began forming in the early 1970s. It was prompted by the collapse of the Bretton Woods system. In turn, Nixon took the liberty of taking the dollar off the gold standard. This enabled exchange rates to be determined by demand and supply. And thus began the new age of the Forex.<\/p>\n<p>The exchange rate is determined by participants which include day-to-day traders, brokers, and international banks, among many others. Generally speaking, <strong>major organizations<\/strong> like commercial banks <strong>hold the most power over the exchange rate<\/strong>. They interact in one of two ways: one-on-one or through a broker.<\/p>\n<p>It’s similar to cryptocurrency trading. However, unlike cryptocurrencies, the FX market handles only <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fiat/">fiat currencies<\/strong><\/a>. Participants of the FX market buy and sell in currency pairs. For instance, GBP\/USD, EUR\/USD, USD\/CAD, and USD\/JPY, among many other currencies. While cryptocurrency markets are available at any time and any day, the Forex market is closed during the weekends. <\/p>\n<p><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-speculative-investment/">Speculative trading<\/strong><\/a> is an often occurrence on the Forex market. Most of the trading happens on the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-spot-market/">spot markets<\/strong><\/a>. Derivatives rely on real-time volume to successfully operate. Investors take into account <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-leverage/">leverage, <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-technical-analysis-trend-analysis-ta/">technical analysis<\/strong><\/a>, and scalping to make financial returns.<\/p>\n<p>Additionally, some FX investors participate in hedge trading. They can employ futures contracts in addition to forward contracts when hedging.<\/p>","definition":"a decentralized currency exchange marketplace.","status":"published","meta_title":"What is Forex (FX)? Definition & Meaning | Crypto Wiki","meta_description":"Forex (FX) meaning: Forex (FX) - a decentralized currency exchange marketplace.","meta_keywords":null}" :prev-section="{"id":418,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/FOMO","level":"easy","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-06T03:46:19.000000Z","slug":"what-is-fomo","title":"What is FOMO?","section":"F","keyword":"FOMO","content":"<p>FOMO originated because any delay might lead a person to miss out on a suitable circumstance.<\/p>\n<p>Although the idea of FOMO is more commonly associated with the <strong>fear of missing out<\/strong> <strong>on a profit<\/strong>, the contrary may also be accurate. Moreover, when coins reach an <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-all-time-high-ath/">all-time high<\/a><\/strong>, traders may want to cash in while the flow is good, prompting others to follow that example. Waiting out implies you may sell after the price has already begun to decline, allowing you to lose out on the large rewards associated with a high price.<\/p>\n<p>A sharp decrease in <a href=https://www.bitdegree.org/"//crypto//buy-bitcoin-btc/">Bitcoin might be driven by a number of signs, with trades occurring at fast speeds. Whispers of government restrictions or out-of-favor markets are enough to induce many to oversell.<\/p>\n<p>For example, <strong>a person may experience FOMO if the value of a cryptocurrency that they do not own rises<\/strong>. That green line moving upwards is enough to send some people into a frenzy, prompting them to rush to acquire whichever currency appears to be surging in price.<\/p>\n<p>The fear of missing that next big profit, the coin everyone wants, or being the trader that misses out, can be an essential indicator in price variations. Nonetheless, trading in cryptocurrencies may be <em>a match of gossip and emotion<\/em>, and <strong>FOMO can have a significant influence on traders' decisions<\/strong> on whether to purchase, sell, or keep. <\/p>\n<p>FOMO can even cause some people to transfer markets in order to get their assets out of a certain market and into their own <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cold-wallet/">cold wallets<\/strong><\/a>.<\/p>\n<p>Besides, FOMO can be what causes people to purchase at the top and hold during a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-dip/">dip after making profits, only to lose some or all of them again.<\/p>\n<p> <\/p>","definition":"acronym for \u201cFear of Missing Out\u201d that refers to the anxiety a person can experience when he doesn\u2019t take action fast enough when making trading decisions.","status":"published","meta_title":"What is FOMO? Definition & Meaning | Crypto Wiki","meta_description":"FOMO meaning: FOMO - or \u201cFear of Missing Out\u201d refers to the anxiety a person can experience when he doesn\u2019t take action fast enough when making trading decisions.","meta_keywords":null}" :model="{"id":977,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Liquidation","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:01.000000Z","updated_at":"2023-12-06T03:51:18.000000Z","slug":"what-is-forced-liquidation","title":"What is Forced Liquidation?","section":"F","keyword":"Forced Liquidation","content":"<p><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidation/">Liquidation refers to the conversion of assets into cash or cash equivalents. The <strong>compulsory conversion <\/strong>of assets into cash is known as forced liquidation. It's a system for generating market orders to exit leveraged positions. The difference between liquidation and forced liquidation is that the latter <strong>occurs automatically <\/strong>when certain requirements are met (or not).<\/p>\n<p>In the crypto world, when an investor doesn’t fulfill the margin requirements for a leveraged position, forced liquidation occurs. Liquidation applies to both – <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-futures/">futures and <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-margin-trading/">margin trading<\/a>.<\/strong><\/p>\n<p>Keep in mind that <strong>liquidation price<\/strong> is something you should pay attention to when trading with <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-leverage/">leverage. If your leverage is high, the liquidation price is very close to your entry.<\/p>\n<p>To illustrate, imagine that you begin with a $100 deposit. Let’s say you take a <strong>15x leveraged long position in the BTC\/ETH market. <\/strong>This means that your position is worth $1500 out of which $100 is yours and the remaining is borrowed.<\/p>\n<p>Now imagine that BTC drops by 10%. What happens? Your position is now worth $1350. That's a bummer, right?<\/p>\n<p>However, imagine that your position continues to lose money. This means that the borrowed funds will definitely be affected but the lender surely doesn't want to lose money on your account. Because of this, your position will most likely be liquidated to safeguard the capital of the lender. Thus, you'll lose your $100 investment.<\/p>\n<p>Keep in mind that a <strong>liquidation fee<\/strong> is usually added to forced liquidation. It differs between platforms platform. However, it encourages traders to close their positions before they get closed automatically. Though a lot of trading platforms allow users to evaluate the liquidation price of a position before it is entered.<\/p>\n<p>Additionally, note that liquidation might also be utilized when talking about <strong>bankruptcy. <\/strong>When a person or a company has to convert its assets into cash, it's referred to as liquidation. In this case, cash is perceived as a \"liquid\" form of an asset.<\/p>","definition":"involuntary closing of the leveraged position of a trader due to his\/her failure to meet the essential margin requirements.","status":"published","meta_title":"What is Forced Liquidation? 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He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? 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