#ETH What is liquidation?

Assuming Bitcoin is $50,000 each, you spend $50,000 to buy one Bitcoin; this is a regular transaction.

However, there is also the concept of margin trading. You still buy one Bitcoin, but this time you only need to put up 10%, which is $5,000, and I will cover the remaining 90%, which is called 10x leverage trading.

Of course, the $45,000 I cover for you is not free; it's a loan, and you must pay me back later.

If Bitcoin rises to $55,000, that's a 10% increase. If you sell and pay me back the $45,000, you still make a net profit of $10,000. This means your initial $5,000 investment has effectively doubled.

However, if Bitcoin drops to $45,000, you will face a problem: the remaining value is only enough to repay the money I lent you. So even though it only dropped by 10%, with 10x leverage, your own $5,000 becomes worthless.

At this point, you might say you are sure the price will come back, and you won't sell. You hold on; is that possible? Definitely not. Your own money can hold on, but the money I lent you is mine. Why should I hold on with you? If it doesn't come back, how will you repay me? Therefore, I have the right to sell the coins for you and take my $45,000 directly. If the selling takes too long and Bitcoin drops to $44,000, then selling the Bitcoin not only leaves you with nothing, but you will also owe me $1,000. This $1,000 is a debt that you must repay; this is what is known as liquidation.

At this point, if you want to avoid liquidation, you only have one choice: to add margin. For example, if you add another $5,000 to your account, then your cash plus the value of Bitcoin will exceed $45,000 again, and I will be reassured.